Working Paper: CEPR ID: DP3513
Authors: Claudio Michelacci; Javier Suárez
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, start-ups face larger costs of going public than mature firms. 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, 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 accelerate firms? access to the stock market 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: Going Public; Growth; Startups; Venture Capital
JEL Codes: E44; G32; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stock Market (G10) | Business Creation (L26) |
| Informed Capital (G31) | Business Creation (L26) |
| Stock Market Liquidity (G10) | Recycling of Informed Capital (L99) |
| Recycling of Informed Capital (L99) | Business Creation (L26) |
| Costs of Going Public (G24) | Business Creation (L26) |
| Economic Environment (F69) | Size of Stock Market Segment for Young Companies (G24) |
| Business Creation (L26) | Innovation and Profitability (O31) |