Does Venture Capital Require an Active Stock Market?

30 Pages Posted: 23 Mar 2000

See all articles by Ronald J. Gilson

Ronald J. Gilson

Stanford Law School; Columbia Law School; European Corporate Governance Institute (ECGI)

Bernard S. Black

Northwestern University - Pritzker School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)

Date Written: May 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

JEL Classification: G12, G18, G24, G31, G32

Suggested Citation

Gilson, Ronald J. and Black, Bernard S., Does Venture Capital Require an Active Stock Market? (May 1999). Available at SSRN: or

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)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Bernard S. Black (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

Northwestern University - Kellogg School of Management

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-5049 (Phone)

European Corporate Governance Institute (ECGI)


Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics