One important channel through which financial development enables economic growth is through the funding of innovative and entrepreneurial projects—activities that have been long recognized as particularly hard to finance with outside capital. Well-developed public equity markets have been shown to be instrumental in filling this financing gap, allowing young and fast-growing companies to fund R&D activities. Recognizing the importance of entrepreneurial finance, a major focus of financial policymakers around the world has been on the creation of new stock exchanges for young and small-capitalization companies, often characterized by less restrictive listing requirements. Such exchanges, termed second-tier exchanges, have been heralded in many places as a way to promote the creation, financing, and retention of job-creating new ventures. Anecdotally, while there have been some highly visible successes (such as NASDAQ in New York, London’s Alternative Investment Market, and the Shenzhen-based ChiNext market), there have been many more failures (such as EASDAQ).
Posted by Shai Bernstein (Stanford University), Abhishek Dev (Harvard University), Josh Lerner (Harvard University), on Thursday, February 21, 2019
Editor's Note: Shai Bernstein is Assistant Professor of Finance at Stanford Graduate School of Business; Abhishek Dev is a Researcher at Harvard Business School; and Josh Lerner is Jacob H. Schiff Professor of Investment Banking at Harvard Business School. This post is based on their recent paper.