Working Paper: NBER ID: w25414
Authors: Shai Bernstein; Abhishek Dev; Josh Lerner
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.
Keywords: entrepreneurial finance; public markets; second-tier exchanges
JEL Codes: G24; G38; L26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increases in demand for entrepreneurial capital (P12) | higher likelihood of introducing second-tier exchanges (G15) |
| stronger shareholder protection (G38) | success of second-tier exchanges (G15) |
| stronger shareholder protection (G38) | younger, less profitable, but faster-growing companies raise more capital (G24) |
| stronger shareholder protection (G38) | mitigates risks associated with investing in firms (G32) |
| introduction of second-tier exchanges (G10) | does not divert IPOs from established exchanges (G24) |