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on Corporate Finance |
| By: | Yoshiki Ando (University of Pennsylvania) |
| Abstract: | The role that venture capital (VC) plays in helping promising startups achieve high growth is examined. Three facts are documented from administrative US Census data and proprietary VC datasets. First, VC-backed firms achieve substantial growth in employment and payroll compared to non-VC-backed firms. Second, VC-backed firms typically raise funding more than 10 times their revenue at age 0 and intensively invest in research and development. Third, venture capitalists acquire around 3.3% extra equity stakes relative to Angel investors. Based on the evidence, I develop a firm dynamics model with endogenous firm productivity and choice of financing from VC, Angel (non-VC-equity) investors, and banks. Venture capitalists provide equity-based funding and managerial advice, but they are in limited supply. The model shows the benefit of VC and Angel financing over bank financing for high-potential firms because of their large investment in innovation, which creates a debt repayment issue with bank financing when innovation is unsuccessful. VC-backed firms achieve substantial growth as a result of endogenous sorting, equity-based funding, and managerial advice. The calibrated model implies that venture capitalists’ advice accounts for around 24% of the growth of VC-backed firms. Finally, policy experiments predict that subsidies to innovation expenditures or equity investments enhance aggregate output and consumption in the steady state in contrast to bank loan subsidies. |
| Keywords: | Venture capital, firm dynamics, innovation, upfront investment, equity, debt, default, endogenous sorting |
| JEL: | D22 D25 E22 G24 G30 O32 |
| Date: | 2024–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:24-012&r= |
| By: | Samuel J. Hempel; Yi Li; Sean Tibay |
| Abstract: | When selecting debt to finance their operations and investments, companies face crucial decisions regarding the appropriate types of debt. Despite the classic Modigliani–Miller (1958) capital structure irrelevance result, real-world market frictions can significantly impact a firm's capital structure decisions. This reality means that one debt type is not a perfect substitute for another, due to differences in important factors including maturity structures, funding purposes, rollover risks, and funding costs. |
| Date: | 2024–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2024-05-03-1&r= |
| By: | Vivien Lefebvre (LARGE - Laboratoire de Recherche en Gestion et Economie - UNISTRA - Université de Strasbourg) |
| Abstract: | A vast body of literature shows that large, publicly listed firms suffer from managerial short-termism and inadequate temporal orientation. We study the temporal orientations, measured as the investment horizons, of firms throughout their lifecycles. We build on theoretical arguments from organizational learning theory and agency theory to argue that the relationship between firm age and the investment horizon is quadratic, with an inverted U shape. Using a large sample of publicly listed and privately held European firms, we obtain results consistent with this prediction. Our results support the idea that younger firms gradually learn to use more sophisticated investment decision criteria, thus resulting in longer investment horizons. However, this effect is bounded by changes in governance structure, such as the separation of ownership from control that results from the transition from an owner-managed status to a professionally managed status. Implications for future research and practice are discussed. |
| Date: | 2023–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04563638&r= |
| By: | Li, Shuo (Faculty of Business and Economics, The University of Hong Kong, Hong Kong, China); Wang, Min (China Center for Economic Research, National School of Development, Peking University, Beijing, China) |
| Abstract: | The paper provides a comprehensive investigation of the effects of environmental regulations on Chinese firms’ extensive margins. Using registration information of all firms in 35 industries from 1991 to 2010, we show that environmental regulations deter firm entry, increase firm exit and reduce the net entry of firms. Specifically, in response to such regulations, large, long-lived and private entrants are less likely to enter the market, and small and long-lived incumbents are more likely to exit. This concentrates the market and expands the state sector in pollution-intensive industries. Moreover, the entrants are more heavily regulated than incumbents. We also find evidence that, in response to environmental regulations, firms in regulated locations are more likely to create new firms in pollution-intensive industries in unregulated areas. However, these spatial spillover effects are negligible, posing little threat to the estimation of environmental regulatory impacts on firm entry in our setting and therefore alleviating the concern of pollution relocation. |
| Keywords: | Environmental Regulation; Firm Entry; Firm Exit; Equity Investment; Spatial Spillover; Inter-city Investment |
| JEL: | L51 O44 Q52 Q58 R38 |
| Date: | 2022–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunefd:2022_015&r= |
| By: | Dyer, Travis; Köchling, Gerrit; Limbach, Peter |
| Abstract: | We show that investors acquire more public information about firms to which they are more socially proximate. On average, a standard deviation increase in the Social Connectedness Index (Bailey et al., 2018) between a firm's headquarter county and a searcher county is associated with 30% more EDGAR filing downloads from the searcher county. The effect of social proximity on traditional investment research is distinct from the effect of geographic proximity. We find similar results studying headquarter relocations, investor-level data, and EDGAR downloads from European regions, for which physical distance should be irrelevant. Social proximity matters more during times of high market-wide uncertainty and for firms with weaker information environments. Finally, information gathered by socially proximate investors predicts short-term earnings and stock returns, but also heightened volatility. Collectively, the evidence indicates that social networks mitigate informational frictions and foster information acquisition in financial markets. |
| Keywords: | Corporate disclosures, EDGAR, Geography, Information acquisition, Social networks, Social connections |
| JEL: | D80 D83 G10 G41 M40 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:294838&r= |
| By: | Banerjee, Biswajit; Herrala, Risto |
| Abstract: | The paper investigates the influence of the speed of liquidation of insolvent firms on leverage. The theoretical model presented formalizes the intuitive view that an increase in liquidation speed is expected to decrease average leverage as highly leveraged firms exit. Analysis of Indian data, however, suggests that an increase in liquidation speed increases average leverage. This finding is linked to influential observations at the right tail of the leverage distribution. We propose an asset-weighted variant of the proposition that holds with empirical data. |
| Keywords: | Indian economy, insolvency and bankruptcy code, liquidation speed, leverage |
| JEL: | C21 D22 G33 K35 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofitp:294826&r= |
| By: | Dmytro Holod; Joe Peek; Gökhan Torna |
| Abstract: | This study provides direct evidence of the value to banks arising from relationship lending by estimating the market premium placed on banking organizations’ small business loan portfolios. Using data from the small business loan survey contained in the June bank Call Reports, we find that small commercial and industrial (C&I) loans add value to community banks both in absolute terms and relative to the value contributed by larger C&I loans. The value‐enhancing effect of small business loans is observed primarily at small community banks, and it was present during the Great Recession as well as during periods of more normal economic conditions. Furthermore, the value creation emanates primarily from the smallest relationship‐based C&I loans, those with original values of $100, 000 or less, and at the smallest community banks. By contrast, small commercial real estate (CRE) loans, being relatively more transactional than C&I loans, do not contribute additional value to community banking organizations. The evidence is consistent with a positive role played by small banks making relationship‐based loans to small firms. |
| Keywords: | small business lending; relationship lending; community banks; bank value; commercial and industrial (C&I) lending; commercial real estate (CRE) loans |
| JEL: | G21 G28 G31 |
| Date: | 2024–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:98190&r= |
| By: | Alexander S. Kritikos (DIW Berlin, University of Potsdam, GLO Essen, IAB Nuremberg, CEPA); Mika Maliranta (University of Jyväskylä); Veera Nippala (University of Jyväskylä); Satu Nurmi (Statistics Finland) |
| Abstract: | We examine how the gender of business-owners is related to the wages paid to female relative to male employees working in their firms. Using Finnish register data and employing firm fixed effects, we find that the gender pay gap is – starting from a gender pay gap of 11 to 12 percent - two to three percentage-points lower for hourly wages in female-owned firms than in male-owned firms. Results are robust to how the wage is measured, as well as to various further robustness checks. More importantly, we find substantial differences between industries. While, for instance, in the manufacturing sector, the gender of the owner plays no role for the gender pay gap, in several service sector industries, like ICT or business services, no or a negligible gender pay gap can be found, but only when firms are led by female business owners. Businesses in male ownership maintain a gender pay gap of around 10 percent also in the latter industries. With increasing firm size, the influence of the gender of the owner, however, fades. In large firms, it seems that others – firm managers – determine wages and no differences in the pay gap are observed between male- and female-owned firms. |
| Keywords: | entrepreneurship, gender pay gap, discrimination, linked employer-employee data |
| JEL: | J16 J24 J31 J71 L26 M13 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:pot:cepadp:76&r= |