Graduation of Initial Public Offering Firms from Junior Stock Markets: Evidence from the Tokyo Stock Exchange

For young and innovative firms, an initial public offering (IPO) is crucial for securing financing for research and development (R&D) investment. This study explores the post-IPO behavior and performance of firms listed on the two junior stock markets of the Tokyo Stock Exchange (TSE): Market of High-Growth and Emerging Stocks (MOTHERS) and JASDAQ. Using a sample of 943 non-financial firms listed on these markets from November 1999 to December 2019, we find that approximately 40% of IPO firms graduate to the TSE main markets, while more than 10% of IPO firms delist from the TSE junior markets. The results reveal that firms listed on the TSE junior markets increase financing cash flow by accessing public equity markets. Moreover, using a survival analysis approach, we examine the factors associated with the time to graduation to the TSE main markets. As a result, we find that young IPO firms and those with high R&D intensity are less likely to graduate from the TSE junior markets. In addition, firms with higher market capitalization are more likely to graduate to the TSE main markets. The results also reveal that listing regulations on graduation to the TSE main markets within 10 years, which were introduced only to MOTHERS, accelerate the graduation of IPO firms when the sample is restricted to firms listed before the announcement of the 10-year rule. Furthermore, we provide evidence that IPO firms that ultimately graduate to the TSE main markets show better post-IPO performance.