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Business Creation and the Stock Market

  • Claudio Michelacci

    (CEMFI)

  • Javier Suarez

    (CEMFI)

We claim that the stock market encourages business creation, innovation, and growth by allowing the recycling of ``informed'' capital. Due to incentive problems, financing new innovative businesses requires entrepreneurs either to sustain a tight relationship with monitors (banks, venture capitalists) whose ``informed'' capital is in limited supply or to undertake an irreversible reorganization that makes the firm transparent enough to access the stock market. We characterize the financial life cycle of firms, showing why they choose to be initially financed through informed capital, reconsidering whether to go public once some uncertainty is resolved. We examine the efficiency properties of the competitive equilibrium and identify the factors that lead to the emergence of a stock market for young fast growing firms, facilitate the recycling of informed capital, and encourage business creation. We also show how the rate of technological progress affects and is affected by stock market development.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0673.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0673
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