Liquidity events and the geographic distribution of entrepreneurial activity

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Citation: Toby E. Stuart, Olav Sorenson (2003) Liquidity events and the geographic distribution of entrepreneurial activity. Administrative Science Quarterly (RSS)
Internet Archive Scholar (search for fulltext): Liquidity events and the geographic distribution of entrepreneurial activity
Tagged: Sociology (RSS) Organization Theory (RSS), Entrepreneurship (RSS), Geography (RSS)


Toby Stuart and Olav Sorenson use data from the biotechnology industry to consider the ecological consequences of "liquidity events" -- essentially IPOs and acquisitions -- on the founding of new start-ups. The idea is that individuals in start-ups become mobile and are able found new firms, but is unlikely to leave the geographic area, when a start-up experiences a liquidity event. The authors show that IPOs accelerate the founding of firms within a metropolitan area, that acquisitions do so as well but only when the acquirer is from outside the biotechnology industry, and that these effects are strongly moderated by the enforceability of non-compete agreements.

Stuart and Sorenson attempt to join the ecological literature on organizational demographic with the sociological literature on entrepreneurship. Their basic argument is based on the idea that liquidity events both make employees more mobile in that financial gains are secured and that they often change the organizational characteristic of the acquired or now-public organization.

The authors offer three formal hypothese:

  1. IPOs of firms in technology-based industries increased the founding rates of similar organizations. (Supported)
  2. Acquisitions of early-stage technology companies by demographically dissimilar firms (which are likeily to change the culture of the firm) increase the founding rate in the industry of the acquired firms. (Supported)
  3. The enforceability of non-compete agreements attenuate these effects. (Supported)

The authors test these three hypotheses, and find support for each, using data on the founding and liquidity events of new biotechnology firms in every metropolitan area in the country.

The authors argue that they make four contributions. The first two are empirical.

  1. The authors are the first to systematically link IPOs to founding rates.
  2. The authors show that state-level employment laws influence the geography of foundings.
  3. The extension of population ecology to study intra-population events by linking a micro-phenomena to a macro-level outcome.
  4. A methodological approach that the authors argue will be generally useful for studying a variety of events.

Theoretical and Practical Relevance

Stuart and Sorenson's article has been widely cited and accumulated more than 500 citation sin the 7 years since its publication. It is primarily cited in the literature on entrepreneurship.