The Impact of Securities Regulation on Financial Development and Entrepreneurship

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AbstractAn economy's growth and innovative output depends on the size and breadth of its entrepreneurial activity. Unlike its large firm peers, the small entrepreneurial firm faces unique impediments to its growth and survival. One such impediment is limited access to capital. This research project will study the impact of state laws regulating capital raising on local financial development, economic growth and entrepreneurial activity. The overarching goal is to understand how regulations that govern raising of capital by small firms affects those firms' outcomes. The project will produce a database describing and quantifying the levels of regulation for equity capital raising by U.S. businesses. Empirical analysis of the data will guide policies that seek to support entrepreneurial activity.Compared to large, established firms, entrepreneurial firms face more costly external finance because of the informational imperfections inherent in their innovative, high-growth objectives such as incentive issues or adverse selection. Traditional bank or credit financing is therefore often unavailable, and these firms instead must raise equity or non-traditional financing that provide incentive and monitoring solutions. Thus, equity market regulations and securities laws will impact the entrepreneurial firm financing constraints. From the early 20th century to the mid-1990s, individual U.S. states were the main regulators of these markets. Their laws exhibited significant variation in complexity both across and within states for much of that time. This project aims to document and categorize these laws, study their origination and finally, investigate their consequences for the capital markets and economic outcomes by examining the effects on entrepreneurial firms.This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.