Short-Term and Long-Term Relationships between Total Factor Productivity (TFP) and Stock Markets: Evidence from a Major Emerging Economy

There is a scarcity of international evidence on the relationships between total factor productivity (TFP) and the prices (and market value) of publicly traded companies. This paper contributes to the related literature by employing an econometric approach based on Vector Autoregression (VAR) and Vector Error Correction (VEC) models in order to test for impacts of TFP on stock market value and prices. The findings capture the long-term dynamics between TFP and firms’ market value while also identifying the impacts of structural innovations in TFP on stock prices. The results indicate that positive TFP shocks favourably influence such prices. Additionally, short-term unexpected increases in the benchmark stock index also positively affect productivity, suggesting that market value may act as a trigger or a leading indicator of productivity. This study innovatively employed the Brazilian stock market as a case for investigation.