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The Going-Public Decision and the Development of Financial Markets

Authors

  • Avanidhar Subrahmanyam,

    1. Anderson Graduate School of Management, University of California at Los Angeles
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  • Sheridan Titman

    1. College of Business Administration, University of Texas at Austin, National Bureau of Economic Research
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    • * Subrahmanyam is from the Anderson Graduate School of Management, University of California at Los Angeles. Titman is from the College of Business Administration, University of Texas at Austin, and the National Bureau of Economic Research. We thank an anonymous referee, René Stulz (the editor), Anat Admati, Franklin Allen, Tony Bernardo, Bhagwan Chowdhry, Joshua Coval, James Dow, Mike Fishman, Domingo Joaquin, Hayne Leland, Raghuram Rajan, Jay Ritter, Mark Rubinstein, Rob Vishny, Ivo Welch, Bill Wilhelm, Andrew Winton, and participants in the 1997Indiana University Symposium and the 1998 American Finance Association meetings, and in seminars at Arizona State, the University of California at Berkeley, the University of Pennsylvania, Northwestern University, New York University, Tinbergen Institute, Tulane University, the Stockholm School of Economics, Michigan State University, and the University of Michigan for useful comments and discussions.

Abstract

This paper explores the linkages between stock price efficiency, the choice between private and public financing, and the development of capital markets in emerging economies. Generally, the advantage of public financing is high if costly information is diverse and cheap to acquire, and if investors receive valuable information without cost. The value of public firms generally depends on public market size, which implies that there can be a positive externality associated with going public, so that an inferior equilibrium can exist where too few firms go public. The model is consistent with empirical observations on financial market development.

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