Question

True, False, or Uncertain: Private equity is a substitute for public equity (i.e., if a country has a relatively active public-equity market, then private-equity activity will be relatively low). Please attach any work in support of your reasoning

Countries with common-law based legal systems have relatively weak protections against investor expropriation. Please attach any work in support of your reasoning.

Answer 1

Private equity is a substitute for public equity. In my opinion, the activity on private placement does not depend on the public equity market being active or inactive. It depends on the size of the company - smaller companies generally take the private placement approach before going to public, since there are very stringent laws that govern the publicly traded securities, and when the borrowing gets public. Moreover, with the private placement, the smaller companies need to convince a handful of investors for investment into their organization, whereas, when the company goes public, then it has to face the huge lot of investors whoever trades on that platform. Mostly, companies that have a fresh start begin with private placement, with a view to go public in future, as and how they grow. Hence, in my view, it would be a false statement when we compare both markets based on each others activities.

Countries with common-law based legal systems have relatively weak protections against investor expropriation. This may be true for developing countries, and which are open to all investors. The law may be common to all, and expropriating any privately held property falls as legal in such countries, where the property is used fro development of public amenities like healthcare, highways, roadways, etc. In such a case, there is no different law for investors holding their private properties - the law sees them in common to other public. However, in a few countries, a differentiaing factor may be that the owners are paid a compensation for such property or a part of property being expropriated. However, its true that the legal system does not hold a bias or a differential for a sect of people in relation to exproriation.