Enterprise ownership constraints and the role of equity markets in financial development

The long standing controversy of the contribution of equity markets to economic development has been reactivated by the emerging markets phenomenon. Positive reassessments have emphasised diversification and liquidity gains for investors funding risky, long lived, projects. The present analysis adopts instead the viewpoint of the issuer; the owner controlled enterprise typical of LDCs. Owners' wealth is a fundamental constraint on expansion when gearing is limited by bankruptcy risk and minority equity issue eases this constraint. It is suggested that equity and debt are thus complementary and that stock markets may improve overall allocative efficiency if equities correctly value firm prospects.