Smaller firms and public equity: new platforms with old problems

Paradoxically, while numbers of listed companies are declining in advanced economies, new equity markets for small and medium-sized enterprises (SMEs) are being developed and recommended as an alternative way of raising capital. This paper contests the conventional wisdom that persistently low levels of public listing represents deficiencies of market design and presents publicly traded equity as fundamentally unsuitable for SMEs due to inherent structural flaws. It begins with the controversial origins of publicly traded equity and finds that developing other investment channels in a culture of 'direct investment in enterprise' would be more beneficial to both SMEs and economies than the development of an 'equity culture' with its associated unproductive trading. In particular, internal funding, recognised as a widespread SME financing preference and common denominator of successful small firms, is found worthy of further examination for opportunities and efficiencies rather than dismissal as an inconsequential or temporary financing method.