Informal investors - A categorization,with policy implications

A number of studies concerning informal investors have been carried out over the last two decades. One main conclusion from previous research has been that the informal venture capital market is very heterogeneous, and that classifications for informal investors are needed in order to more accurately depict the informal venture capital market. In this paper we propose that the market could be divided in accordance with the informal investors' investment activity and competence. The study is based on a sample of 425 active informal investors, divided into four different categories: (1) Lotto investors; (2) Traders; (3) Analytical investors; and (4) Business angels. The empirical findings show that there are considerable differences between the four categories of informal investors; differences regarding the information sources used, the level of firm involvement, co-investing, investment horizons, and geographic preferences, to name some examples. As a consequence, each of the various informal investor types responds differently to private and public prospects or motivators. It is suggested, therefore, that the informal venture capital market could be more effectively analysed and depicted by using the proposed classifications and applying differing measures to each informal investor category.     

Special Issue

The role of informal venture capital in entrepreneurial process and economic development is increasingly recognized by scholars and policy-makers around the world. Much of the attention that this form of financing has received during the last couple of decades is due to its potential to bridge the regional equity gap. This study is concerned with regional distribution of informal venture capital and factors explaining the allocation of informal investments, and it is based on a large random sample of informal venture capital investors in Sweden. The key findings are that the informal venture capital market in Sweden shows a considerable concentration in metropolitan areas and university cities. Further, investments conducted in these places are allocated in proportion to the new business formation rate and concentration of technology-based firms, while the only factor that provides some explanation for the location of informal investments in the peripheral regions is the proportion of the regional population that is considering starting their own business. Finally, there is a small but significant reallocation of informal venture capital from peripheral regions to metropolitan areas and university cities, which shows that the informal venture capital market in Sweden contributes rather to sustaining the regional equity gap than to bridging it.     

The Risk-Relevance of Accounting Data: Evidence from the Spanish Stock Market

This paper analyses the relevance of accounting fundamentals to inform about equity risk as measured by the cost of equity capital. Assuming the latter is a summary measure of how investors make decisions regarding the allocation of resources, the strength of the association between the cost of capital and the accounting‐based measures of risk indicates how important these measures are for market participants when making economic decisions. To infer the cost of equity capital, we use the O'Hanlon and Steele's method, which is based on the residual income valuation model. Moreover, we use the insights from this model to provide a theoretical underpinning for the choice of the accounting variables related to risk. The sample refers to the non‐financial firms listed in the Madrid Stock Exchange along the period 1987–2002. Our results support our initial expectations regarding the association between the cost of equity capital and the accounting‐based risk variables, thereby supporting the usefulness of fundamental analysis to determine the risk inherent in share's future payoffs. In particular, we highlight the role of investing risk, which has been ignored in previous research. Our results are also robust to measures of risk other than the cost of capital such as the variability in total returns and the firm's systematic risk (β).     

Capital allocation to alternatives with a multivariate ladder gamma return distribution

This paper considers investment decision making when returns have a multivariate gamma distribution which has the particular correlation structure of Furman’s ladder gamma distribution. With an exponential utility function It is shown that there is a subset of the candidate investment opportunities to which investment should be allocated. This subset can be readily identified in a two step process that results in a list of candidate investments that is ranked in sequence of decreasing risk. The last investment opportunity on this list will be no risk cash. Investments are then selected from this list in sequence up to a cutoff point that depends on the investors capital and degree of risk aversion. If capital and degree of risk aversion are sufficiently large so that it is optimal to allocate some to no risk cash, then the capital allocated to each risky investment is a constant fraction of the total capital allocated to risky investments irrespective of how risk averse is the investor.     

Technovation and the informal investor

Technovation is a creative process in financial as well as technical terms. Inventors, entrepreneurs, and venture capital are the key ingredients in the technovation process. The key financial concepts include venture capital risk/reward trade-offs, discounted cash flow evaluation of income producing assets, and the risk-bearing role of entrepreneurs and venture investors. This paper discusses and illustrates the economic creativity of successful technovation, and explores the division of rewards between inventor/entrepreneurs and venture investors. Capital market gaps affecting the financing of emerging, technology-based ventures are identified. The paper concludes with a discussion of current research in-to the role of informal investors (essentially financially sophisticated individuals of means) as a source of risk capital for inventors and entrepreneurs.     

Aggregate volatility expectations and threshold CAPM

We propose a volatility-based capital asset pricing model (V-CAPM) in which asset betas change discretely with respect to changes in investors’ expectations regarding near-term aggregate volatility. Using a novel measure to proxy uncertainty about expected changes in aggregate volatility, i.e. monthly range of the VIX index (RVIX), we find that portfolio betas change significantly when uncertainty about aggregate volatility expectations is beyond a certain threshold level. Due to changes in their market betas, small and value stocks are perceived as riskier than their big and growth counterparts in bad times, when uncertainty about aggregate volatility expectations is high. The proposed model yields a positive and significant market risk premium during periods when investors do not expect significant uncertainty in near-term aggregate volatility. Our findings support a volatility-based time-varying risk explanation.     

RISK AVOIDANCE STRATEGIES IN VENTURE CAPITAL MARKETS

This research compares risk avoidance strategies employed by business angels and venture capital firm investors. It finds that differences in their approaches to evaluating risk lead them to hold predictably different views of the dangers of market and agency risk. the former tend to rely upon the entrepreneur to protect them from losses due to market risk. Consequently, they are more concerned with agency risk than market risk. the latter are more concerned with market risk because they have learned to protect themselves contractually from agency risk using boilerplate contractual terms and conditions. A likely result of their different approaches to avoiding risk is a segmentation of venture capital markets, which has important implications for both entrepreneurs and future research.     

Family businesses and non-family equity: literature review and avenues for future research

Family firms commonly prefer internal funding and retention of control. Under certain circumstances, however, equity investments from outside the family can be a relevant alternative source of capital. To facilitate further knowledge about the interaction of family-owned businesses and external equity investors, the present work reviews 42 studies and suggests possible directions for future research. Results reveal that extant studies focus mainly on five key areas—corporate finance, contract design and collaboration, succession and exit route, strategy and performance, and corporate governance. Moreover, the paper discusses various gaps in the extant work and presents three opportunities for future research in a detailed manner. These include a comparison of different types of investors in the context of family-owned businesses, an investigation of minority investor exits from family firms, and an analysis of the impact of investors on family firm boards. All in all, the findings can guide the future development of this emerging field of research and have implications for theory and practice.     

MAKING INDONESIA MORE ATTRACTIVE TO FOREIGN INVESTORS: A COMPUTABLE GENERAL EQUILIBRIUM ANALYSIS OF REDUCING THE RISK PREMIUM IN CENTRAL JAVA

Indonesia aims to increase inward foreign direct investment. However, widespread discrimination in how investments are treated, the weak application of the rule of law and opaque regulations have increased the risk premium confronting potential investors and impaired foreign direct investment. This study employs a Computable General Equilibrium Model to simulate the economic effect of a reduction in the risk premium in Central Java on investors in the chemical sector and a select range of sectors nominated by the Central Java government as representing investment opportunities. The results suggest capital flows to Central Java increase, generating higher employment, labor productivity, real wages and GDP in Central Java. At the national level, real investment, aggregate capital stock and GDP increase for Indonesia as a whole. The policy implications are that greater transparency and consistency in the application of the rule of law, will increase capital inflow and result in improved macroeconomic performance.     

我国认股权证定价问题实证分析——以宝钢JTB1为例

伴随着股权分置改革的全面推进,权证在中国资本市场上重新登场,大大丰富了广大投资者的交易策略。然而,认股权证固有的高杠杆性和高风险性,需要对其价格波动规律展开深入研究。通过运用B-S模型对宝钢权证进行定价,发现其价值被市场严重高估。分析理论价值与实际价格重大差异的原因,进一步研究影响认股权证定价的各种因素,可以提出投资认股权证的指导建议。     

An approach to evaluate incentive policies for energy development

The federal energy agencies are continuously seeking new energy resources to make the U.S. self-sufficient in its energy requirements. Geopressured resources have been identified for quite some time as possible candidates. However, the fundamental barriers to commercializing this source of energy are the excessive capital investments necessary and high uncertainty. This study proposes a methodology for exploring the use of economic incentives as instruments to stimulate the growth of geopressured resource development in the United States. It also identifies how incentive policy options are related to the fundamental barriers against a U.S. geopressured gas capability. The study models the geopressured development project as a Monte Carlo simulation. The geopressured system model simulates the production from a known geopressured resource. The profitability of the geopressured resource development project under alternate incentive policy options is evaluated as to their impact on two base case scenarios of potential investors in such development projects. The evaluations concern the policy impacts on improving project economics and risks. Results indicate that economic incentive policies are effective tools for improving the profitability of geopressured resource development projects. Each incentive serves different purposes with regard to inherent economics, project risks, marketplace uncertainties, and developers' access to capital. The effectiveness of the incentive policies depends on the developer's attitudes and attributes.     

Risk premia in multi-national enterprises

The CAPM implies that investors require equity risk premia when choosing risky investments and therefore demand higher returns to equity invested if higher risk is present. This should apply to investments in independent enterprises and multi-national enterprises alike. This hypothesis is investigated by analyzing a panel of 407,000 European firms for the years 1985 to 2010. When income is set in relation to invested capital, risk measured by earnings volatility emerges as the most important stable determinant of income. Results indicate that both MNEs and independent firms regularly account for risk as a major determinant of income when pricing international goods and services. Hence international taxation rules for multi-national enterprises should account for risk premia in transfer prices and resulting profits.     

The Structure and Management of Alliances: Syndication in the Venture Capital Industry*

abstract Syndicates are a form of inter‐firm alliance in which two or more venture capital firms co‐invest in an investee firm and share a joint pay‐off. Syndication is a significant part of the venture capital market yet little research has been conducted into the process of structuring syndicate deals and the management of syndicates following deal completion. This paper analyses the neglected issues concerning the structuring and management of syndicated venture capital investments from the perspectives of both lead and non‐lead syndicate members using two surveys of venture capital firms and examination of syndication documents. Lead investors typically have larger equity stakes and the syndicated investment agreement is a document that enshrines the rights of participants rather than specifying behaviour. Contractual arrangements typically serve as a back drop to relationships as non‐legal sanctions are important and decisions are typically reached following discussion and consensus, but lead venture capital investors’ residual and specific powers are important in ensuring timely decision‐making. The findings extend previous work on alliances by emphasizing the importance of non‐legal sanctions, especially reputation effects, in mitigating opportunistic behaviour by dominant equity holders. The paper also adds to the limited research on the dynamics of alliances by highlighting the role of repeat syndicates.     

A Rational Expectations Consistent Measure of Risk: Using Financial Market Data from a Middle Income Context*

Although economic theory assumes that risk is of central importance in financial decision making, it is difficult to measure the uncertainty faced by investors. Commonly used empirical proxies for risk (such as the moving standard deviation of the returns on an asset) are not firmly grounded in economic theory. Risk measures have been developed by other studies, but these are often based on subjective weights attaching to a range of objective component indicators, are difficult to replicate and are not strictly consistent with underlying theory. The contribution of this article is to develop a methodology to construct rational expectations consistent empirical risk measures. It has the advantages of being explicitly consistent with economic theory and easily replicable. We illustrate this methodology by specific application to the South African context. The time‐varying risk measure developed in this article is consistent with a rational expectations application of the expectations hypothesis. The constructed measure is a broad one (it includes political risk and peso problems for instance) and reflects investors’ perceptions of systematic risk.     

Can we expect institutional investors to improve corporate governance?

The purpose of this paper is to investigate the way institutional investors use information for equity-investment purposes, and to discuss the implications that this may have for the role of these investors as owners of public companies. On the basis of an empirical study, the paper reports that institutional investors tend to use very little of the available information regarding listed companies, and to simplify their forming of expectations. They managed this by setting a priori limitations on the investment alternatives, by relying on highly trusted external advisors, and by overemphasising the quarterly updating of the spreadsheet model. It is argued in the paper that if institutional investors are assigned a leading role in corporate governance, their heavy dependence on external advisors and their over-emphasis on quarterly financial information, may have negative implications for the management of listed companies.     

Foreign ownership,firm performance,and the geography of civic capital

It is well established in the literature that foreign affiliates are subject to a series of governance and assimilation costs that may deteriorate their performance. This is particularly relevant for firms which have been recently acquired by foreign investors. We employ the variation in civic capital across Italian provinces as an exogenous determinant of these governance costs. We claim that the effect of foreign ownership on productivity is less favorable in areas where civic capital is low. As the level of local civic capital increases, the scope for opportunistic behavior is reduced, which makes the governance of foreign affiliates easier and improves their performance. We take this prediction to the data and find confirmation of our conceptual framework. Our analysis uncovers the importance of the geographic heterogeneity of informal norms and institutions in analyzing the nexus between foreign ownership and performance.     

IPO performance of portfolio ventures funded by impact investors versus venture capital investors

With the global rise of impact investments to achieve societal goals, an increasing number of new ventures that aim to create societal impact now seek to go public. However, while many conceptual studies suggest that impact investors are less likely to pursue financially oriented exit plans in exchange for generating societal impact, there is little empirical evidence to back up this claim. Using a propensity score matching approach, we draw on data from Crunchbase and empirically compare the initial public offering (IPO) performance of a large sample of 3398 investments by impact investors with 3398 investments by matched venture capital (VC) investors. We find that impact investor investments are less likely to lead to an IPO than VC investments. Besides, our results indicate that syndication by impact investors increases the likelihood of an IPO. This suggests that companies funded by impact investors benefit more from syndication than their VC-funded counterparts. Our findings have practical implications for impact investors, portfolio ventures, and policymakers.     

Heterogenous beliefs with sentiments and asset pricing

We present a dynamic equilibrium model with two irrational investors: an extrapolator and a contrarian, whose beliefs regarding the growth rate of dividend stream are biased by their sentiments. The key contribution is to connect two disagreements with the degree of irrationality of investors and to provide novel insights into the predictability of stock return. We show that the higher level of sentiment disagreement is, the more stock price is overvalued. However, the future stock price will decline because the extrapolator’s sentiment will cool down over time. Therefore, the sentiment disagreement negatively predicts future return. At the meanwhile, our model not only shows that the survey expectations about cashflows increase the variations in asset price and dampen the corresponding volatility, but also helps to explain the mixed results about the relationship between the investors’ belief dispersions and stock return predictability.     

Creating social capital in MNCs: the international human resource management challenge

Social capital has assumed a critical role in the successful implementation of global strategy for multinational companies (MNCs). The article focuses on the ways in which the international human resource management (IHRM) system and those responsible for it influence the creation and utilisation of social capital in MNCs. It examines the challenges posed to IHRM by the wide diversity of definitions and manifestations of social capital found in the multiple cultural contexts of the global business environment and provides a framework on how to approach the cultural influences on the definitions and behavioural expressions of social capital. It also critically assesses the recommendations that have been made regarding developing social capital in MNCs, the competencies most critical to the ability to develop social capital in multiple cultural settings, and provides a set of recommendations for future research in this area.     

基于海外投资商与东道国动态博弈的税收风险研究

海外投资商遭受的东道国税收风险对投资成败具有关键影响作用,如何更好地规避税收风险,实现海外投资收益最大化,是投资者面临的难题。在综合考虑海外投资商对东道国本地企业的技术溢出效应和竞争效应基础上,构建海外投资商与东道国之间的动态博弈框架,分析海外投资商与东道国的策略互动,寻求海外投资商应对税收风险的最优投资策略。研究结果表明：东道国政府通常会给予海外投资商特定免税期,不过达到稳定状态后,均衡税率和海外投资商的资本存量会受技术溢出影响。