Second-tier Stock Exchanges and Growth of Entrepreneurship

We examine the role of second-tier stock exchanges in an entrepreneurial context from a global perspective. We construct a country-industry-year panel of global VC-invested startups, and find a significant increase in entrepreneurial activities following the launch of such markets. A causal interpretation is supported by additional tests for staggered difference-in-differences regressions, instrumental variable regressions based on the adoption of electronic trading in main stock exchanges, and interacted regressions based on industry-specific dependence on second-tier stock exchanges. We propose a VC exit mechanism that receives empirical support: the launch of second-tier stock exchanges positively predicts (i) VC investment in startups, (ii) VCs’ valuation of startups, (iii) startups’ patenting records, (iv) startups’ IPO likelihood, and (v) startups’ IPO valuation. Moreover, more startups were created in countries with more VC investment after the launch of such markets. Finally, we find that the effect of second-tier stock exchanges on entrepreneurial ventures increases with financial resources, human capital, and intellectual property protection.