The Creation and Evolution of Entrepreneurial Public Markets
This paper explores the creation and evolution of new stock exchanges around the world geared towards entrepreneurial companies, known as second-tier exchanges. Using hand-collected novel data, we document the proliferation of these new stock exchanges that were created in a large number of countries, attracted a significant volume of global IPOs, were introduced fairly cyclically, and had lower listing requirements when compared to first-tier stock exchanges. We find that increases in demand for entrepreneurial capital—as proxied for by patenting, IPOs, and stock market valuations—led to a higher likelihood of the introduction of second-tier exchanges. We find no evidence that new second-tier exchanges diverted the existing flow of IPOs from established stock exchanges. Shareholder protection strongly predicted exchange success, even in countries with high levels of venture capital activity, patenting, and financial market development. Second-tier exchanges in countries with better shareholder protection allowed younger, less profitable, but faster-growing companies to raise more capital. These results highlight the importance of institutions in enabling the provision of entrepreneurial capital to young companies.
We thank Harvard Business School’s Division of Research, the Private Capital Research Institute, the Smith-Richardson Foundation, and the Toulouse Network on Information Technology for financial support. Josh Lerner periodically receives compensation for advising institutional investors, private equity firms, corporate venturing groups, and government agencies on topics related to entrepreneurship, innovation, and private capital. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Shai Bernstein & Abhishek Dev & Josh Lerner, 2019. "The Creation and Evolution of Entrepreneurial Public Markets," Journal of Financial Economics, . citation courtesy of