Does Venture Capital Require an Active Stock Market?
Ronald J. Gilson
Stanford Law School; Columbia Law School; European Corporate Governance Institute (ECGI)
Bernard S. Black
Northwestern University - School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)
As published in Journal of Applied Corporate Finance, pp. 36-48, Winter 1999
The United States has both an active venture capital industry and well-developed stock markets. Japan and Germany have neither. We argue here that this is no accident -- that venture capital can flourish especially -- and perhaps only -- if the venture capitalist can exit from a successful portfolio company through an initial public offering (IPO), which requires an active stock market. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers especially the importance of exit by venture capitalists and the opportunity, present only if IPO exit is possible, for the venture capitalist and the entrepreneur to enter into an implicit contract over control, in which a successful entrepreneur can reacquire control from the venture capitalist by using an IPO as the means of exit.
Note: This article is a shortened version of Black and Gilson, "Venture Capital and the Structure of Capital Markets: Banks versus Stock Markets," Journal of Financial Economics, Vol. 47, pp. 243-277, 1998. A nearly final version of the longer article is available on SSRN at http://ssrn.com/abstract=46909
Number of Pages in PDF File: 30
JEL Classification: G12, G18, G24, G31, G32Accepted Paper Series
Date posted: March 23, 2000
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