This paper argues that financial market development is one of the driving forces behind the rise in firm level uncertainty. Theoretically, we focus on the role of risk sharing among investors. Financial globalization and stockmarket development, by broadening the pool of potential investors, promote risk sharing; this enables firms listed on the stock exchange to adopt more profitable and riskier strategies. But in equilibrium, all firms compete on the labor and product markets. In order to maintain their market shares in front of more aggressive listed firms, non listed firms are induced to bear more risk as well. The overall result is a pervasive increase in sales volatility and labor market reallocations, amplified by the extent of product market competition. We then find supportive empirical evidence for our theory by looking at French data, using the 1984-1990 stockmarket reforms as an experiment. Focusing on the French experience is useful for two main reasons: first, this event is sufficiently concentrated in time to provide us with a clear break in ownership structure. Secondly, French data give access to a large set of privately held firms, of size comparable to listed ones: we will use them as a control group to filter out contemporaneous shocks to the French economy that have nothing to do with finance. Our evidence holds in front of various robustness checks: in particular, we seek to control for the degree of information technology diffusion, which may have affected publicly and privately held firms differently.

Since the 1970s, most developed economies experienced dramatic developments of their financial markets (see figure 1 for the US, the UK and France). In financial markets, the past three decades have been years of intense financial and technical innovations, unleashed international capital flows and stockmarket reforms. As financial markets became more global, fluid and efficient, a mix of socio demographic changes in some advanced economies channeled more and more savings to them. As a result of these mutations, the average investor changed from a passive, unexperienced, underdiversified household into an active, sophisticated and potentially foreign fund manager, well aware of notions such as risk, return and portfolio management. While the broad outlook is the same across all developed economies, the details of the picture vary from one place to the other. In the US, the dominant post war trend has indeed been one of rising institutionalization of equity ownership (Friedman [1996]): the share of outstanding equity directly held by households has declined from over 90% in 1950 to about 50% in the mid 1990s, and pension and mutual funds have progressively replaced households as the real owners of corporate America. In France the stockmarket was deeply reformed by the government in the late 1980s. Within a few years, capital controls were lifted, the Paris stock brokers’ monopoly was dismantled, tax incentives were provided to equity investors and stock issues were made simpler. This prompted a massive increase in the number of shareholders and in the rising involvement of domestic and foreign financial institutions.