The Dark Side of Institutional Intermediaries: Junior Stock Exchanges and Entrepreneurship

Abstract

Research Summary Our study shows how institutional intermediaries established to foster the creation of new firms might hinder new firm growth instead. We show that intermediaries can reduce new firm growth rates due to institutional conflict. To analyze this idea, we examine the setting of junior stock exchanges, which are commonly formed to facilitate entrepreneurial growth. The introduction of these exchanges focused investment into new technology firms, reduced investment in other sectors, and led to diminishing new firm growth. Our findings demonstrate how institutional conflict causes unintended effects and reveals the complexity of influencing entrepreneurship with institutional intermediaries. Managerial Summary Investors and entrepreneurs face uncertainly when deciding what firms to start and fund. We show that an intermediation effort to make entry easier for entrepreneurs increases the uncertainty that entrepreneurs and investors face. For investors, the enthusiasm for technology firms engendered by the new exchange can motivate investment in marginal firms to maintain an adequate deal flow. However, lower firm growth and less liquidity in the future is likely. For entrepreneurs, our results indicate that it will be more challenging to manage technology firm growth as well as more opportune to investigate other industries. Finally, for policy-makers and supporters of the new exchanges, our results imply that investment flows are altered as intended, but unless listing standards remain high, the virtuous cycle of investment upon which a healthy entrepreneurial climate rests may be disrupted, muting the intended effects of the new exchange.

Keywords: entrepreneurship, intermediaries, institutional theory, institutional change, institutional conflict

JEL Classification: M13, G28, N20, N25