[Summary]
In capital markets, a company's price, its stock price, is determined every day.
There was a time when stock prices were relatively easy to explain with sales, net income, assets, PER, and PBR. These indicators still matter. But modern capital markets no longer move on them alone.
The market is not only looking at past profits. It is looking at which future markets the company can capture, what networks it can control, and whether it can keep creating value above its cost of capital.
Capital markets are shifting from a place that evaluates a company's past report card to a place that trades future survival probability and the cost of risk at the same time.
This article, as the capital markets chapter of New Price Formation Theory, organizes how prices are formed in capital markets: who decides stock prices.
This article is a general educational and market-structure discussion. It does not recommend buying or selling any specific stock or financial product. Stock prices fluctuate due to earnings, interest rates, supply and demand, foreign exchange, regulation, geopolitics, and investor psychology, and principal losses can occur.
New Price Formation Theory Series
We live surrounded by many prices: stock prices, hourly wages, interest rates, foreign exchange, and the value of data.
Who decides them, and under what rules?
This series reads modern capitalism through the question of who controls the rules of price formation.
- New Price Formation Theory | Who Decides Prices?
- New Price Formation Theory | Capital Markets: Who Decides Stock Prices? (this article)
- New Price Formation Theory | Labor Markets: Who Decides Wages?
- New Price Formation Theory | Financial Markets: Who Decides the Price of Money?
- New Price Formation Theory | Foreign Exchange Markets: Who Decides the Price of the Yen?
- New Price Formation Theory | Data Markets: Who Decides the Price of Data?
Price Is Another Name for Power
Prices look like neutral numbers.
But the distribution of wealth changes depending on who controls the rules that decide those prices.
Those who control stock-price formation influence corporate financing power. Those who control wage formation influence workers' lives. Those who control interest rates influence the burdens of households, companies, and states.
A price is not just an exchange ratio.
It is also the control over capital, labor, credit, and information expressed as a number.
This chapter deals with capital markets, where almost every form of wealth intersects.
1. The Age When Markets Buy Future Survival Probability
Corporate value used to be easier to explain by assets and current profits.
Factories, land, equipment, cash. Companies with tangible assets and steady cash generation still receive a certain level of market recognition.
This point should not be misunderstood.
Capital markets have not abandoned past profits or asset value. Value investing, dividend investing, asset-value analysis, and PBR repair trades still matter.
But the market's center of gravity is changing.
In a digitalized and globalized economy, past success and physical assets do not necessarily guarantee future growth. Old facilities, rigid organizations, and portfolios that cannot adapt can even become burdens.
Capital is not buying only where a company stands today.
It is buying the probability that the company will survive in future markets and access large profit pools.
Even with large current profits, if a business model lacks repeatability or cannot adapt to technological and demand shifts, the market discounts the stock.
Conversely, companies with thin current profits can attract large amounts of capital if the market sees future market control, data accumulation, network effects, and pricing power.
Capital markets are moving from evaluating the past report card to trading future survival probability.
2. From Vertical Integration To Network-Based Value Formation
As the rules change, the objects of valuation expand from tangible to intangible assets.
Japan's Ministry of Economy, Trade and Industry describes intellectual assets as invisible corporate strengths such as human resources, technology, organizational capabilities, customer networks, and brands. The Value Creation Guidance 2.0 also treats investment strategies in intangible assets, including human capital and intellectual property, as a key issue in corporate value creation.
Capital markets are not only asking how many factories a company owns.
They are asking how strong a network the company can build, how much external resources it can attract, how high switching costs can become, and how much data and brand value it can accumulate.
Traditional companies procured materials, manufactured, and sold largely on their own. That was vertically integrated value formation.
Many highly valued companies today do not create value alone.
Users, developers, advertisers, merchants, creators, enterprise customers, AI models, data centers, semiconductors, and payment networks are connected on platforms that amplify the value of the entire ecosystem.
Investors are not looking only at the absolute amount of operating profit.
| What the market watches | Meaning for stock price |
|---|---|
| Network effects | Does value rise as users increase? |
| Data accumulation | Does usage improve accuracy or monetization? |
| Barriers to entry | Is the structure hard for competitors to copy? |
| Pricing power | Can the company raise prices without losing customers? |
| Capital efficiency | Does invested capital produce sufficient returns? |
| Governance | Is there a will and system to return value to shareholders? |
Capital markets are buying not just self-contained businesses, but the market value of mechanisms that expand by involving others.
3. Why Markets Apply Discounts
But a strong future story is not enough.
Modern capital markets have another cold mechanism.
Markets buy expectations. At the same time, they harshly discount structural weakness.
Large companies and holding companies with multiple businesses may trade below the theoretical sum of their parts. This is the conglomerate discount.
Why does the market refuse to recognize visible asset value as-is?
Because capital prices liquidity and governance strictly.
Even if a company owns promising assets or subsidiaries, their value may not be immediately monetizable. Parent-subsidiary conflicts may exist. Investment criteria may be opaque. Capital allocation may depend too much on management discretion.
When such structures exist, markets subtract uncertainty from price.
Capital-market price formation is a tug-of-war between two vectors.
| Vector | Content |
|---|---|
| Expectations | Growth markets, network effects, pricing power, intangible assets, capital efficiency |
| Discounts | Low liquidity, complex structure, governance distrust, opaque capital allocation |
Stock prices are not decided only by beautiful stories told by companies.
Markets listen to the story while asking whether the profits will truly reach shareholders, whether returns exceed the cost of capital, and whether growth investment is disciplined.
4. What The Tokyo Stock Exchange Reform Shows
In Japanese equities, this change is symbolized by the Tokyo Stock Exchange's request for management conscious of cost of capital and stock price.
In March 2023, the TSE asked all companies listed on the Prime and Standard markets to understand their cost of capital and capital profitability, analyze and assess market valuation at the board level, and disclose and update plans for improvement.
This matters a great deal.
Being listed is not enough. Generating profits is not enough. Accumulating retained earnings is not enough.
If a company is entrusted with capital, it must explain how it uses that capital, what return it produces, and why its stock price is justified.
The issue of PBR below 1x is not just a story about low-priced stocks.
From the market's perspective, it asks whether the company is using capital effectively, whether it is being left below liquidation value, and whether management treats stock price as its own issue.
The TSE reform was a reminder of the rules of price formation that capital markets impose on companies.
Stock prices are decided by the market, but companies also have a responsibility to provide materials that the market can accept.
Conclusion: Whoever Controls The Rules Controls Value
Who decides the price called a stock price?
There is no single answer.
Managers present business strategies, investors price expectations and risk, exchanges set disclosure and governance rules, and interest rates, exchange rates, and policy move discount rates. Stock prices are formed where these forces intersect.
At the center is a cold valuation rule.
Companies with structures that can leverage the future receive high prices. Even with a growth story, weak capital efficiency or governance leads to discounts. Even stable profits do not lift valuation much if the picture for future survival is weak.
Capital-market price formation tells us something beyond the rise and fall of individual companies.
Value is no longer determined only by what a company owns today.
Who controls the rules of the future?
The market prices that control.
Next: Labor Markets
Capital markets decide stock prices. Labor markets decide wages.
But the same question remains.
Who decides that price?
While capital freely prices future value, who should decide the price of the living labor that supports it, and through what kind of competition?
That tension surfaced in the Japan Fair Trade Commission's inspection of major staffing agencies.
The next chapter covers price formation in labor markets.
- New Price Formation Theory | Labor Markets: Who Decides Wages?
- New Price Formation Theory | Financial Markets: Who Decides the Price of Money?
- New Price Formation Theory | Foreign Exchange Markets: Who Decides the Price of the Yen?
- New Price Formation Theory | Data Markets: Who Decides the Price of Data?
Sources
- Japan Exchange Group, "Request for Action to Implement Management That Is Conscious of Cost of Capital and Stock Price"
- Japan Exchange Group, "Publication of Key Points and Examples Based on Investor Perspectives"
- Ministry of Economy, Trade and Industry, "What Are Intellectual Assets and Intellectual Asset Management?"
- Ministry of Economy, Trade and Industry, "Value Creation Guidance 2.0"
- Tokyo Stock Exchange, "Disclosure Status on Management Conscious of Cost of Capital and Stock Price"
- Checked on: 2026-06-02