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Entrepreneurial Equity Financing and Securities Regulation: An Empirical Analysis

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  • Cécile Carpentier

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  • Jean-Marc Suret

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    Abstract

    To protect investors, securities regulation generally restrains entrepreneurial ventures from entering the stock market. Scholars and regulators contend that strong rules and requirements for listing are essential to prevent the market from failing. However, these constraints can also unduly impede the growth of new ventures. We use the Canadian case to examine the effects of the relaxation of the regulatory constraints. Unlike in other countries, firms in Canada can list at a very early stage, without revenues, with a minimal size and even without writing a prospectus using the reverse merger technique. This provides a unique opportunity to examine entrepreneurial ventures listed on a public market. The quality of firms, their post-listing operating performance and strategy, and their fate largely support the opinion that strong listing requirements are essential to prevent the emergence of a lemon market. Investors involved in this market obtain very poor returns. This indicates that they are neither able to set correct prices in this market nor to deal with the high level of information asymmetry therein. The reluctance of most regulators to relax the requirements for small business finance can therefore be justified. La réglementation des valeurs mobilières interdit généralement l’accès au marché boursier des entreprises en démarrage, afin de protéger les investisseurs. Des universitaires et les organismes de réglementation prétendent que des règles strictes et des exigences fortes sont nécessaires pour éviter l’échec du marché. Toutefois, ces contraintes peuvent limiter de façon exagérée les possibilités de croissance des entreprises émergentes. Nous exploitons la situation très particulière du Canada pour étudier l’effet du relâchement des contraintes réglementaires. Dans ce pays, les entreprises émergentes peuvent entrer en Bourse au moyen de prises de contrôle inversées, alors qu’elles ne rapportent pas de revenus et présentent une capitalisation minime. Elles peuvent même échapper à l’obligation de préparer un prospectus. Cette situation permet d’étudier des entrepreneurs inscrits sur un marché public d’actions. La qualité des entreprises, de même que leur performance après l’accès en Bourse et leur stratégie de financement sont cohérente avec la proposition qui veut que le relâchement des règles permet l’émergence d’un marché d’entreprises de mauvaises qualités, un lemon market. Les investisseurs, qui subissent des rendements anormalement faibles, ne semblent pas être en mesure d’apprécier correctement la valeur des émetteurs ni de gérer les importants problèmes liés à l’asymétrie informationnelle dans ce contexte. Les réticences de la majorité des organismes de réglementation à baisser les normes minimales d’inscription semble don bien être justifiée.

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    Bibliographic Info

    Paper provided by CIRANO in its series CIRANO Working Papers with number 2009s-10.

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    Date of creation: 01 Apr 2009
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    Handle: RePEc:cir:cirwor:2009s-10

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    Keywords: securities regulation; entrepreneurial ventures; equity financing; reverse takeover; public policy.; réglementation des valeurs mobilières; entrepreneurs; entreprises émergentes; émissions d’actions; prise de contrôle inversée; politique publique.;

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    1. Colin Mason & Richard Harrison, 2001. "'Investment Readiness': A Critique of Government Proposals to Increase the Demand for Venture Capital," Regional Studies, Taylor & Francis Journals, vol. 35(7), pages 663-668.
    2. Beck, H.T.L. & Demirgüç-Kunt, A., 2006. "Small and medium-size enterprises: Access to finance as a growth constraints," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125429, Tilburg University.
    3. Elizabeth Demers & Philip Joos, 2007. "IPO Failure Risk," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 333-371, 05.
    4. Becchetti, Leonardo & Trovato, Giovanni, 2002. " The Determinants of Growth for Small and Medium Sized Firms: The Role of the Availability of External Finance," Small Business Economics, Springer, vol. 19(4), pages 291-306, December.
    5. Denis, David J., 2004. "Entrepreneurial finance: an overview of the issues and evidence," Journal of Corporate Finance, Elsevier, vol. 10(2), pages 301-326, March.
    6. Rafael Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2006. "What Works in Securities Laws?," Journal of Finance, American Finance Association, vol. 61(1), pages 1-32, 02.
    7. Carpentier, Cecile & Suret, Jean-Marc, 2006. "Bypassing the financial growth cycle: Evidence from Capital Pool Companies," Journal of Business Venturing, Elsevier, vol. 21(1), pages 45-73, January.
    8. Stuart M. Locke & Kartick Gupta, 2007. "The performance of entrepreneurial companies post-listing on the New Zealand Stock Exchange," Venture Capital, Taylor & Francis Journals, vol. 10(1), pages 87-110, May.
    9. Robert E. Carpenter & Bruce C. Petersen, 2002. "Is The Growth Of Small Firms Constrained By Internal Finance?," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 298-309, May.
    10. François Derrien & Ambrus Kecskés, 2007. "The Initial Public Offerings of Listed Firms," Journal of Finance, American Finance Association, vol. 62(1), pages 447-479, 02.
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