The going-public decision and the development of financial markets

This paper explores the linkages between stock price efficiency, the choice between private and public financing, and the development of capital marke ts in emerging economies. Generally, the advantage of public financing is h igh if costly information is diverse and cheap to acquire, and if investors receive valuable information without cost. The value of public firms gener ally depends on public market size, which implies that there can be a posit ive externality associated with going public, so that an inferior equilibri um can exist where too few firms go public. The model is consistent with em pirical observations on financial market development.