As noted by Gurley and Shaw, there is a typical pattern of economic development in which the evolution of the financial system is an essential aspect of the growth process. We focus on one component of this evolution: the increasing importance of equity markets as an economy grows. We develop a growth model where capital accumulation is financed externally through a combination of debt and equity. We illustrate why equity market activity might grow – often very rapidly – as an economy develops. We also illustrate why access to equity markets may not be needed in the early stages of economic development.
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Received: December 30, 1997; revised version: May 26, 1998
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Boyd, J., Smith, B. The evolution of debt and equity markets in economic development. Economic Theory 12, 519–560 (1998). https://doi.org/10.1007/s001990050234