Published Working Papers
WITH JOHN M. BARRIOS (Washington University in St. Louis & NBER) HANYI YI (Boston College)
We examine the effect of the introduction of ridehailing in U.S. cities on fatal traffic accidents. The arrival of ridehailing is associated with an increase of approximately 3% in the number of fatal accidents, for both vehicle occupants and pedestrians. Consistent with ridehailing increasing road usage, we find that introduction is associated with an increase in proxies for traffic congestion and with new car registrations. Consistent with a driver quality channel, accident increases are concentrated in ridehailing-eligible vehicles and those with passenger configurations suggestive of ridehailing. Back- of-the-envelope estimates of the annual cost in human lives range from $5.33B to $13.24B. We propose a variety of operational as well as policy prescriptions for regulation of ridehailing operations that may help limit such externalities.
The Rise of Dual-Class Stock IPOs
WITH DHRUV AGGARWAL (Yale University) OFER ELDAR (Duke University) LUBOMIR P. LITOV (University of Oklahoma)
We create a novel dataset to examine the recent rise in dual-class IPOs. We document that dual-class firms have different types of controlling shareholders and wedges between voting and economic rights, and that the increasing popularity of dual-class structures is driven by founder-controlled firms. We find that founders’ wedge is greater when founders have stronger bargaining power. The increase in founder control over time is due to greater availability of private capital and technological shocks that reduced firms’ needs for external financing. Stronger bargaining power is also associated with a lower likelihood of sunset provisions that terminate dual-class structures.
revised version
WITH JOHN M. BARRIOS (Washington University in St. Louis & NBER)
We explore the potential impact of taxation of carried interest at ordinary income rates on the economic attractiveness of new VC fund formation and its potential impact across US states. Our analysis suggests that changing the taxation regime for carried interest from taxation at (long-term) capital gains rates to ordinary income rates would significantly reduce the attractiveness of forming a new fund for the vast majority of funds in U.S. states other than CA, MA and NY. These funds are predominantly smaller, earlier stage funds, and represent a significant proportion of available VC funding sources outside of the traditional Big 3 VC states. Given the importance of VC funding for U.S. innovation, our findings may serve to inform and aid policymakers in their current deliberations as they consider, design, and implement potential new tax laws that will affect the VC industry.
WITH JOHN BARRIOS (University of Chicago) LIVIA HANYI YI (Rice University)
The introduction of the gig economy creates opportunities for would-be entrepreneurs to supplement their income in downside states of the world and provides insurance in the form of an income fallback in the event of failure. We present a conceptual framework supporting the notion that the gig economy may serve as an income supplement and as insurance against entrepreneurial-related income volatility, and utilize the arrival of the on-demand, platform-enabled gig economy in the form of the staggered rollout of ridehailing in U.S. cities to examine the effect of the arrival of the gig economy on new business formation. The introduction of gig opportunities is associated with an increase of ~5% in the number of new business registrations in the local area, and a correspondingly-sized increase in small business lending to newly registered businesses. Internet searches for entrepreneurship-related keywords increase ~7%, lending further credence to the predictions of our conceptual framework. Both the income supplement and insurance channels are empirically supported: the increase in entry is larger in regions with lower average income and higher credit constraints, as well as in locations with higher ex-ante economic uncertainty regarding future wage levels and wage growth.
WITH JOHN M. BARRIOS (Washington University in St. Louis) EFRAIM BENMELECH ( Northwestern University & NBER) PAOLA SAPIENZA (Northwestern University & NBER) LUIGI ZINGALES ( University of Chicago & NBER)
Using mobile phone and survey data, we show that during the early phases of COVID-19, voluntary social distancing was greater in areas with higher civic capital and amongst individuals exhibiting a higher sense of civic duty. This effect is robust to including controls for political ideology, income, age, education, and other local-level characteristics. This result is present for U.S. individuals and U.S. counties as well as European regions. Moreover, we show that after U.S. states began re-opening, high civic capital counties maintained a more sustained level of social distancing, while low civic capital counties did not. Finally, we show that U.S. individuals report a higher tendency to use protective face masks in high civic capital counties. Our evidence points to the importance of considering the level of civic capital in designing public policies not only in response to pandemics, but also more generally.
WITH JOHN M. BARRIOS (Washington University in St. Louis)
Politics may color interpretation of facts, and thus perceptions of risk, the formation of expectations, and choices. We find that a higher share of Trump voters in a county is associated with lower perceptions of risk during the COVID-19 pandemic. Controlling for case counts and deaths in the local area, as Trump's vote share rises, individuals search less for information on the virus and its potential economic impacts, and engage in fewer visits to non-essential businesses—suggesting less reallocation of consumer activity across categories. These patterns persist in the face of state-level guidelines to “stay home,” and reverse only when conservative politicians are exposed and the White House releases federal social distancing guidelines. We find support for a media channel as an explanation for our findings, though we cannot rule out that some individuals are motivated instead by rejection of mainstream views. Our results suggest that politics and the media may play an important role in determining the formation of risk perceptions, and may therefore affect both economic and health-related reactions to unanticipated health crises.
National Science Foundation SciSIP Grant Recipient (~$450K)
Kauffman Foundation Grant Recipient ($20K)
The Design of Startup Accelerators
WITH SUSAN COHEN (University of Georgia) DANIEL C. FEHDER (University of Southern California & MIT) Fiona Murray (MIT Sloan & NBER)
Accelerator programs are an increasingly important part of entrepreneurial ecosystems. While accelerators have core defining features—fixed-term, cohort-based educational and mentorship programs for startups—there is also significant variation amongst them. In this paper, we relate key variation in the antecedents, organizational design and operation of these programs to theories of firm-level entrepreneurial performance. We then document descriptive correlations between these design elements and the performance of the startups that attend these programs. In doing so, we probe the connections between design and performance in ways that integrate previously disparate research on accelerators and expand our understanding of startup intermediaries. Our findings delineate the building blocks as well as an agenda for future researchers to build upon not only our understanding of accelerators, but also our understanding of what new ventures need to survive and flourish.
ICPM Grant Recipient
WITH ALEXANDER ANDONOV (Erasmus University & NBER) JOSHUA D. RAUH (Stanford University & NBER)
We examine how political representatives affect the governance of organizations. Our laboratory is public pension funds and their investments in the private equity asset class. Representation on pension fund boards by state officials or those appointed by them—often determined by statute decades past—is strongly and negatively related to the performance of private equity investments made by the fund. Funds whose boards have high fractions of government officials choose poorly within investment categories potentially related to economic development, such as real estate and venture capital. They overweight investments in in-state funds, as well as in funds that are small, have inexperienced GPs, and have few other investors. Lack of financial experience contributes to poor performance of boards dominated by plan participants, but does not explain the underperformance of boards heavily populated by state officials. Political contributions from the finance industry to elected state officials on pension fund boards are strongly and negatively related to performance, but do not fully explain the performance differential.
NBER IPE Research Grant, 2014
WITH CARLOS J. SERRANOT (Universitat Pompeu Fabra & Barcelona GSE) ROSEMARIE H. ZIEDONIS (Boston University & NBER)
This paper investigates the market for lending to technology startups (i.e., venture lending) and examines two mechanisms that may facilitate trade within it: (1) the ‘salability’ of patent collateral; and (2) the credible commitment of existing equity investors. We find that intensified trading in the secondary patent market is strongly related to the annual rate of startup lending, particularly for startups with more redeployable patent assets. Moreover, we show that the credibility of venture capitalist commitments to reinvest in their startups’ next round of financing can be critical for startup debt provision. Utilizing the crash of 2000 as a severe and unexpected capital supply shock for VCs, we show that lenders continue to finance startups with recently funded investors better able to credibly commit to refinance their portfolio companies, but withdraw from otherwisepromising projects that may have needed their funds the most. The findings are consistent with predictions of incomplete contracting and financial intermediation theory.
Real Estate Research Institute Grant, 2010
Market Timing and Investment Selection: Evidence from Real Estate Investors
WITH TOBIAS MUHLHOFER (University of Miami)
We examine commercial real estate fund managers’ abilities to generate abnormal profits through selection of outperforming property sub-market segments or through the timing of entry into and exit from sub-markets. The vast majority of portfolio managers exhibit little market timing ability, with the exception of non-NYSE REITs after the financial crisis. A substantial fraction of managers seem able to successfully select property sub-markets. Selection performance exhibits significant persistence. Managers that are active in more liquid markets tend to exhibit better timing performance, while managers exhibiting better selection ability appear to be active in less liquid markets.
Accelerating Entrepreneurs and Ecosystems: The Seed Accelerator Model
Recent years have seen the emergence of a new institutional form in the entrepreneurial ecosystem: the seed accelerator. These fixed-term, cohort-based, "boot camps" for startups offer educational and mentorship programs for startup founders, exposing them to wide variety of mentors, including former entrepreneurs, venture capitalists, angel investors, and corporate executives; and culminate in a public pitch event, or "demo day," during which the graduating cohort of startup companies pitch their businesses to a large group of potential investors. In practice, accelerator programs are a combination of previously distinct services or functions that were each individually costly for an entrepreneur to find and obtain. The accelerator approach has been widely adopted by private groups, public and government efforts, and by corporations. While proliferation of accelerators is clearly evident, with worldwide estimates of 3000+ programs in existence, research on the role and efficacy of these programs has been limited. In this article, I provide an introduction to the accelerator model and summarize recent evidence on their effects on the regional entrepreneurial environment.
Specialization and Competition in the Venture Capital Industry
WITH MICHAEL J. MAZZEO (Northwestern University) Ryan C. McDevitt (Duke University)
An important type of product differentiation in the venture capital (VC) market is industry specialization. We estimate a market structure model to assess competition among VCs -- some of which specialize in a particular industry and others of which are generalists -- and find that the incremental effect of additional same-type competitors increases as the number of same-type competitors increases. Furthermore, we find that the effects of generalist VCs on specialists are substantial, and larger than the effect of sametype competitors. Estimates from other industries typically show the incremental effects falling as the number of same-type competitors increases and the effects of same-type competitors as always being larger than the effects of different-type competitors. Consistent with the presence of network effects that soften competition, these patterns are more pronounced in markets that exhibit dense organizational networks among incumbent VCs. Markets with sparser incumbent networks, by contrast, exhibit competitive patterns that resemble those of other, non-networked industries.
Prize for Best Private Equity Paper, European Financial Association 2009
Informational Hold-up and Performance Persistence in Venture Capital
Why don’t successful venture capitalists eliminate excess demand for their follow-on funds by aggressively raising their performance fees? We propose a theory of learning that leads to informational hold-up in the VC market. Investors in a fund learn whether the VC has skill or was lucky, whereas potential outside investors only observe returns. This gives the VC’s current investors hold-up power when the VC raises his next fund: Without their backing, he cannot persuade anyone else to fund him, since outside investors would interpret the lack of backing as a sign that his skill is low. This hold-up power diminishes the VC’s ability to increase fees in line with performance. The model provides a rationale for the persistence in after-fee returns documented by Kaplan and Schoar (2005). Empirical evidence from a large sample of U.S. VC funds is consistent with the model. We estimate that up to 68.7% of VC firms lack skill.
Local Overweighting and Underperformance: Evidence from Limited Partner Private Equity Investments
WITH JOSHUA D. RAUH (Stanford University & NBER)
Institutional investors exhibit substantial home-state bias in private equity. This effect is particularly pronounced for public pension fund investments in venture capital and real estate. Public pension funds achieve performance on in-state investments that is 2-4 percentage points lower than both their own similar out-of-state investments and similar investments in their state by out-of-state investors. States with political climates characterized by more self-dealing invest a larger share of their portfolio locally. Relative to the performance of the rest of the private equity universe, overweighting and underperformance in local investments reduce public pension fund resources by $1.2 billion per year.
Venture Capital and Corporate Governance in the Newly Public Firm
I examine the effects of venture capital backing on the corporate governance of the entrepreneurial firm at the time of transition from private to public ownership. Using a selection model framework that instruments for venture backing with variations in the supply of venture capital, I conduct three sets of tests comparing corporate governance in venture- and non–venture-backed initial public offering (IPO) firms. Venture-backed firms have lower levels of earnings management, more positive reactions to the adoption of shareholder rights agreements, and more independent board structures than similar non–venture-backed firms, consistent with better governance. These effects are not common to all pre-IPO large shareholders.
Financial Services Exchange Grant Recipient, Searle Grant Recipient
Incentives, Targeting, and Firm Performance: An Analysis of Non-executive Stock Options
WITH LAURA LINDSEY (Arizona State University)
We examine whether options granted to non-executive employees affect firm performance. Using new data on option programs, we explore the link between broad-based option programs, option portfolio implied incentives, and firm operating performance, utilizing an instrumental variables approach to identify causal effects. Firms whose employee option portfolios have higher implied incentives exhibit higher subsequent operating performance. Intuitively, the implied incentive-performance relation is concentrated in firms with fewer employees and in firms with higher growth opportunities. Additionally, the effect is concentrated in firms that grant options broadly to non-executive employees, consistent with theories of cooperation and mutual monitoring among co-workers.
Networking as a Barrier to Entry and the Competitive Supply of Venture Capital
We examine whether strong networks among incumbent venture capitalists (VCs) in local markets help restrict entry by outside VCs, thus improving incumbents’ bargaining power over entrepreneurs. More densely networked markets experience less entry, with a one-standard deviation increase in network ties among incumbents reducing entry by approximately one-third. Entrants with established ties to targetmarket incumbents appear able to overcome this barrier to entry; in turn, incumbents react strategically to an increased threat of entry by freezing out any incumbents who facilitate entry into their market. Incumbents appear to benefit from reduced entry by paying lower prices for their deals.
A Lobbying Approach to Evaluating the Sarbanes-Oxley Act of 2002
We evaluate the impact of the Sarbanes-Oxley Act (SOX) on shareholders by studying the lobbying behavior of investors and corporate insiders in order to affect the final implemented rules under SOX. Investors lobbied overwhelmingly in favor of strict implementation of SOX, while corporate insiders and business groups lobbied against strict implementation. We identify firms most affected by the law as those whose insiders lobbied against strict implementation. Such firms appear to be characterized by agency problems, rather than motivated by concerns over compliance costs. Cumulative stock returns during the five and a half months leading up to SOX passage were approximately 7% higher for corporations whose insiders lobbied against SOX disclosurerelated provisions than for similar non-lobbying firms, consistent with an expectation that SOX would reduce agency problems. Analysis of returns in the post-passage implementation period suggests that investors’ positive exp
Is IPO Underperformance a Peso Problem?
Recent studies suggest that the underperformance of IPOs in the post-1970 sample may be a small sample effect or "Peso problem." That is, IPO underperformance may result from observing too few star performers ex post than were expected ex ante. We develop a model of IPO performance that captures this intuition by allowing returns to be drawn from mixtures of outstanding, benchmairk, or poor performing states. We estimate the model under the null of no ex ante average IPO underperformance and construct small sample distributions of various statistics measuring IPO relative performance. We find that small sample biases are extremely unlikely to account for the magnitude of the post-1970 IPO underperformance observed in data.
Top-cited paper in the Journal of Finance , 2008
Winner of Emerald Citation of Excellence award, 2011 and 2014
Whom You Know Matters: Venture Capital Networks and Investment Performance
Many financial markets are characterized by strong relationships and networks, rather than arm’s-length, spot market transactions. We examine the performance consequences of this organizational structure in the context of relationships established when VCs syndicate portfolio company investments. We find that better-networked VC firms experience significantly better fund performance, as measured by the proportion of investments that are successfully exited through an IPO or a sale to another company. Similarly, the portfolio companies of better-networked VCs are significantly more likely to survive to subsequent financing and eventual exit. We also provide initial evidence on the evolution of VC networks.