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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)

May 1999

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, G32

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Date posted: March 23, 2000  

Suggested Citation

Gilson, Ronald J. and Black, Bernard S., Does Venture Capital Require an Active Stock Market? (May 1999). As published in Journal of Applied Corporate Finance, pp. 36-48, Winter 1999. Available at SSRN: http://ssrn.com/abstract=219174 or http://dx.doi.org/10.2139/ssrn.219174

Contact Information

Ronald J. Gilson
Stanford Law School ( email )
559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-0614 (Phone)
650-725-0253 (Fax)
Columbia Law School ( email )
435 West 116th Street
New York, NY 10025
United States
212-854-1655 (Phone)
212-854-7946 (Fax)
European Corporate Governance Institute (ECGI)
B-1050 Brussels
Bernard S. Black (Contact Author)
Northwestern University - School of Law ( email )
375 E. Chicago Ave
Unit 1505
Chicago, IL 60611
United States
512-503-2784 (Phone)

Northwestern University - Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-5049 (Phone)
European Corporate Governance Institute (ECGI)
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