Factors That Influence Economic Growth

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Economic growth is influenced by several issues. This can be in a positive way, for example with investments by firms which leads to a bigger gross domestic product, or in a negative way, like increasing currency exchange rates which are used when trading with other countries and leads to a lower gross domestic product. Besides these simple examples there are also more difficult factors that can influence growth. One of these difficult factors that can influence economic growth are institutional investors and mutual funds. Economists are not unanimous about the question if the institutional investors affect economic growth in a positive or in a negative way. Therefore, I will study the literature about this topic and I will try to provide an…show more content…
Buying-back shares is not without a risk says the article in The Economist (2014). “Some view buy-backs as a form of financial sorcery, on a par with all those abstruse credit derivatives that helped cause the financial crisis. Others accept that buy-backs are a legitimate way to return cash to shareholders but worry about their extent. They fear they have become a kind of corporate cocaine that induces a temporary feeling of invincibility but masks weakness and vacuity. They worry the boom will damage firms and the economy.” (The Economist,…show more content…
I only found some things, like meeting short-term goals and buying-back shares of shareholders, that can have influence on economic growth. In the share buy-back article (The Economist, 2014) is only stated that “They worry…will damage…the economy.” and they don’t come up with hard evidence. In the studies about monitoring and controlling managers of firms, they found evidence that not monitoring will lead to an incentive for managers to shrink (Jensen and Meckling, 1976). Also the compensation of managers will be higher when they are not controlled by institutional investors (Hartzell and Starks, 2003). This means that without monitoring and controlling by institutional investors, there is an agency problem which can lead to maximizing personal wealth of managers instead of maximizing value of the firm. All together, I have to answer the question “Do institutional investors hinder economic growth” with a no. I have only found that institutional investors and mutual funds can affect investments of firms by their hunger for cash returns, but it has not been proven that investors hinder economic growth. Besides that, I think that institutional investors play a huge role in maximizing firm values, which is good for the economy, by monitoring and controlling managers and managers not letting maximize their personal

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