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, and the initial capitalization and performance of subsequent ventures. Such IPO market reforms are widespread, but their effectiveness is unclear. 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 30,000 new firms incorporated after 1982, we find that IPO market reform is a powerful institutional lever that increases the rate of IPOs, attracts capital, and improves the performance of some ventures. But it is also a blunt instrument that influences only some industries, triggers poor performance among firms where it has an effect, and improves performance for only elite entrepreneurs. Overall, we find that IPO market reform is a complex institutional change. We conclude with contributions at the nexus of institutional theory and entrepreneurship that indicate where and for whom institutional change will be effective, and indicate that lowering barriers to successful exit like IPOs amplifies the performance variance among new firms.