On the performance of a stepping-stone market

To fill the equity gap, several international bodies suggest developing stepping-stone markets. These stock markets aim to nurture the most profitable emerging firms until they get large enough to move to the main markets. This paper investigates the extent that a stepping-stone market can indeed feed a main board with good quality firms. We analyze 209 graduations from the Canadian stepping-stone market benchmarked with 191 initial public offerings (IPOs) on the main Canadian board from 1997 to 2015. Three years before entering the main board, future graduates are significantly less mature than future IPO firms, but ultimately there are as many graduations as IPOs on the main board. There is no significant difference between the quality of graduates and IPOs: investors similarly appraise both categories of firms, which exhibit similar post-listing long-run performance. In Canada, the stepping-stone market thus seems a valuable financing strategy for growth-oriented ventures, apparently fulfilling its role of fostering the development of innovative firms and feeding the senior market.