Journal Article

Business Creation and the Stock Market

Claudio Michelacci and Javier Suarez

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 71, issue 2, pages 459-481
Published in print April 2004 | ISSN: 0034-6527
Published online April 2004 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/0034-6527.00292
Business Creation and the Stock Market

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  • Intertemporal Choice and Growth
  • Investment Banking
  • Business and Management
  • Corporate Governance

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We claim that the stock market encourages business creation, innovation, and growth by allowing the recycling of “informed capital”. Due to incentive and information problems, start-ups face larger costs of going public than mature firms. Sustaining a tight relationship with a monitor (bank, venture capitalist) allows them to finance their operations without going public until profitability prospects are clearer or incentive problems are less severe. However, the earlier young firms go public, the quicker monitors' informed capital is redirected towards new start-ups. Hence, when informed capital is in limited supply, factors that lower the costs for start-ups to go public encourage business creation. Technological spill-overs associated with business creation and thick market externalities in the young firms segment of the stock market provide prima facie cases for encouraging young firms to go public.

Keywords: D92; G24; G32; M13

Journal Article.  11594 words.  Illustrated.

Subjects: Intertemporal Choice and Growth ; Investment Banking ; Business and Management ; Corporate Governance

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