Presidential Address 2024: The Value and Profits of Firms.

This article investigates the substantial rise in the real stock market value of publicly traded U.S. firms since 1980, attributing about 80% of this increase to profits—split between current and expected future profits (45%) and retained earnings or shareholder equity (35%)—and 20% to changes in discount factors. It proposes valuing firms based on accounting profits rather than dividends, arguing that dividends are an imperfect and volatile measure since firms typically pay out only about half of their profits. Using firm-level data from Compustat and a general equilibrium model incorporating market power and common ownership, the study finds that increased market power since 1980 is a primary driver of higher profits and valuations, with stricter antitrust enforcement potentially reducing average stock market values by 45% today and by 80% if market power had never risen. The model also highlights welfare trade-offs, showing that while increased competition lowers firm profits and market values, it benefits consumers and workers by reducing deadweight losses from market power. The findings are supported by extensive empirical analysis and counterfactual simulations, with global data indicating similar but less pronounced trends outside the U.S.