Externalities in stock market listing: Empirical evidence
Due to the presence of random liquidity shocks and random productivity shocks, there are demand for liquidity and scope for diversification from the investors Liquidity and/or opportunity to diversify helps investors to avoid costly premature liquidation and to minimize the loss from productivity shocks. Liquidity also increases productivity by giving the investors the freedom to choose the maturity of the investments that maximize the productivity. Stock markets provide the liquidity and the scope for diversification to the investors. As the liquidity and/or opportunity to diversify increases, more investors are induced to the markets and more firms issue equity in the stock markets. When firm issue equity it further increases the scope for diversification attracting even more investors into the stock market. So there exists an externality in the stock market listing Pagano (1993) argued that there is a threshold in the number of firms listing in the stock market. Once the number of firms listing crosses that threshold, the externality becomes self-reinforcing. This study empirically investigates the presence of the externality in stock market listing by evaluating the financing choices of the firms and concluded that the said externality is present in the stock markets where large number of firms are issuing stocks, as predicted by the theories.
Kabir, Mohammad A, "Externalities in stock market listing: Empirical evidence" (2000). ETD Collection for Fordham University. AAI9964570.