by floating new shares. The added interest costs (in the case of debt fi-
nancing) and the dilution of earnings (in the case of equity financing) re-
duce the growth of per share earnings.
It is possible that growth can occur in the short term without capi-
tal expansion by using the existing plant more intensely. But the long-
run historical evidence strongly suggests that capital must be expanded
to support higher growth. One of the signal characteristics of long-term
historical data is that the level of the capital stock—the total value of all
physical capital such as factories and equipment as well as intellectual
capital—has grown over time roughly in proportion to the level of ag-
gregate output. In other words, a 10 percent increase in GDP ultimately
requires a 10 percent increase in the capital stock.^5CHAPTER 8 The Impact of Economic Growth on Market Valuation and the Coming Age Wave 125
FIGURE 8–1a
Long-Term Dollar Returns Reported for 16 Countries against Each Country’s Average Real GDP
Growth, 1900 through December 2006(^5) For a good summary of all this literature, see Jay R. Ritter, “Equity Growth and Equity Returns,”
Pacific-Basin Finance Journal, vol. 13 (2005), pp. 489–503.