How Making it Easier to Succeed Reduces Success: IPO Reform and New Firm Performance

Abstract

We examine how institutional changes that lower the barriers to successful exit influence the rate of IPO’s, the initial capitalization, and the performance of subsequent ventures. Such IPO market reforms are widespread, but their effectiveness is unclear. To do so, we take advantage of a quasi-natural experiment in which the IPO listing requirements in Japan were dramatically reduced. Using a unique database of over 19,000 new firms incorporated after 1982, we find that IPO market reform is a powerful institutional lever that increases the rate of IPOs. But it is also a narrow instrument that influences only few industries and triggers poor average performance in those industries. Overall, we find that IPO market reform is a complex institutional change. We conclude with contributions at the nexus institutional theory and entrepreneurship that indicate where and for whom institutional change will be effective