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    15 Jan 2019Working Paper Summaries

    The Creation and Evolution of Entrepreneurial Public Markets

    by Shai Bernstein, Abhishek Dev, and Josh Lerner
    Since 1990, new stock exchanges geared toward fast-growing, entrepreneurial companies have proliferated around the world. This analysis shows that exchanges in countries with better shareholder protection allowed younger and less profitable companies to raise more capital. These markets alone cannot boost entrepreneurial activity but need enabling institutions.
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    Author Abstract

    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.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: December 2018
    • HBS Working Paper Number: HBS Working Paper #19-061
    • Faculty Unit(s): Finance; Entrepreneurial Management
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    Josh Lerner
    Josh Lerner
    Jacob H. Schiff Professor of Investment Banking
    Unit Head, Entrepreneurial Management
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