Venture capital and the structure of capital markets

Banks versus stock markets

Bibliographic Data

ID23325565
AuthorsBernard S Black (0000-0002-6499-0600, New York Law School, corresponding author), Ronald J Gilson (New York Law School)
Year1998
Volume47
Issue3
Pages243-277
Publication date1998-03-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueJournal of Financial Economics (JOURNAL)
Journal identifiersISSN: 0304-405X • E-ISSN: 1879-2774
PublisherElsevier BV (PUBLISHER)
DOI10.1016/s0304-405x(97)00045-7
OpenAlexW3121865524
LanguageEN
Citations received51
References cited29

The United States has many banks that are small relative to large corporations and play a limited role in corporate governance, and a well developed stock market with an associated market for corporate control. In contrast, Japanese and German banks are fewer in number but larger in relative size and are said to play a central governance role. Neither country has an active market for corporate control. We extend the debate on the relative efficiency of bank- and stock market-centered capital markets by developing a further systematic difference between the two systems: the greater vitality of venture capital in stock market-centered systems. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers; especially, the importance of the opportunity to enter into an implicit contract over control, which gives a successful entrepreneur the option to reacquire control from the venture capitalist by using an initial public offering as the means by which the venture capitalist exits from a portfolio investment. We also extend the literature on venture capital contracting by offering an explanation for two central characteristics of the U.S. venture capital market: relatively rapid exit by venture capital providers from investments in portfolio companies; and the common practice of exit through an initial public offering.

Business · Capital market · Corporate governance · Economics · Financial capital · Financial system · Human capital · Initial public offering · Market economy · Monetary economics · Portfolio · Social venture capital · Stock market · Venture capital · Corporate Finance and Governance · Finance · Private Equity and Venture Capital · State Capitalism and Financial Governance

Tools

Open DOISci-HubOpen Access