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Business Creation and the Stock Market

Author

Listed:
  • Claudio Michelacci
  • Javier Suarez

Abstract

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, new start-ups face high flotation costs. Sustaining a tight relationship with a monitor (bank, venture capitalist) allows them to postpone their going public decision until profitability prospects are clearer or incentive problems are less severe. However, monitors' informed capital is in limited supply and the earlier young firms go public the quicker this capital is redirected towards new start-ups. Hence factors that lead to the emergence of a stock market for young firms also encourage business creation. Given the role of new businesses in innovation, our theory suggests a novel linkage between financial development and growth.

Suggested Citation

  • Claudio Michelacci & Javier Suarez, 2000. "Business Creation and the Stock Market," Working Papers wp2000_0009, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp2000_0009
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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