We claim that the stock market encourages business creation,innovation,and growth by allowign the recycling of "informed capital".Due to incentive and information problems,start-ups face larger costs ofgoing public than mature firms.Sustaining a tight relationship with a moitor (bank,venture capitalist)allows them to finance their operations without going public until profitability prospects re clearer or incentive problems are less severe.However,the earlier young firms go public,the quicker moitor's informed capital is redirected towards new start-ups.hence,when informed cpaital is in limited supply,factors that lower the costs for costs for start-ups to go public encourage business creation.Technologicla spill-overs associated with bussiness creation and thick market externalities in the young firms sement of the stock market provide prima facie cases for encouraging young firms to go public.
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