Social capital and entrepreneurial financing choice

This paper investigates the influence of social capital on young firms' financing arrangements. Using a sample of U.S. start-ups, I find that social capital, as captured by secular norms and social networks in the entrepreneur's county, increases access to outside financing and reduces reliance on owner equity to finance the new venture. Financing to entrepreneurs located in counties with greater social capital involves higher amounts of leverage in the form of outside debt. This finding persists in a difference-in-difference test that controls for unobservable geographic determinants of capital structure.     

Severity of financing constraints and firms' investments

According to standard investment theory, the current investments of more financially constrained firms should be smaller than those of less constrained firms with similar investment opportunities. In this paper, I develop a dynamic investment model in which the project value and the severity of financing constraints can vary over time. My results contradict standard theory. To preempt further financing risk in the future, severely constrained firms may engage in more active investment behavior even if they face relatively high additional financing costs at the time. My numerical example demonstrates that a relatively low probability of future risk is sufficient to cause such preemptive behavior.     

Home mortgage debt financing of nonhousing investments

Home mortgage debt is decomposed into a component that represents debt demand, derived from housing demand and a residual excess demand. This excess demand derives principally from the demand for nonhousing assets. An empirical model of the determinants of the demand for excess debt is specified and estimated using databases from the 1983 and 1986 Surveys of Consumer Finance. The estimations focus on evidence of linkages between debt demand and household preferences for illiquid risky assets, and on the substitutability of personal debt for mortgage debt. Positive linkages are found between household choices of investments in vacation homes, investment real estate, and closely held business and the demand for excess debt. However, personal debt and mortgage debt appear to have largely separate financing roles.     

Heterogeneous beliefs and optimal ownership in entrepreneurial financing decisions

Our setting comprises one entrepreneurial firm with a growth opportunity seeking for external funding from a venture capitalist, where the entrepreneur and venture capitalist have homogeneous or heterogeneous beliefs about its growth prospects. We developed a real options model to determine the optimal ownership structure that triggers the simultaneous exercise of the growth option on the entrepreneurial firm by entrepreneurs and venture capitalists. Our results show that the more optimistic any of the parties is, the lower the post-money firm ownership that party will retain. However, optimism leads parties to delay their decision to invest in the entrepreneurial firm, by demanding higher profit triggers and investing only in more valuable entrepreneurial firms. The combination of these two effects leaves perceived returns on investment unchanged and not dependent on their own optimism.     

Bankruptcy in long-term investments

Long-term portfolio management is an important issue in modern finance and practice. We have analysed various known continuous-time strategies in portfolio management, with a focus on bankruptcy probabilities under these strategies. We show that, for each strategy, there is a threshold in the target return rate. When the target return rate is set above this threshold, the application of the strategy for a long investment horizon leads to certain bankruptcy. For a target return rate lower than this threshold, bankruptcy never occurs. Bankruptcy probabilities under a finite investment horizon are also studied. An empirical study based on the Dow Jones Industrial Average Index confirms these results. By comparing the behaviour of these strategies in various parameter regions, we reveal connections among these seemingly different strategies.     

Optimal investments in volatility

Volatility has evolved as an attractive new asset class of its own. The most common instruments for trading volatility are variance swaps. Mean returns of DAX and ESX variance swaps over the time period of 1995 to 2004 are strongly negative, and only part of the negative premium can be explained by the negative correlation of variance swap returns with stock market indices. We analyze the implications of this observation for optimal portfolio composition. Mean-variance efficient portfolios are characterized by sizable short positions in variance swaps. Typically, the stock index is also sold short to achieve a better portfolio diversification. To capture heterogeneous preferences for higher moments, we use a variant of the polynomial goal programming method. We assume that investors strive for a high Sharpe ratio, high skewness, and low kurtosis. Our analysis reveals that it is often not possible to achieve a balanced tradeoff between Sharpe ratio and skewness. Investors are advised to hold the extreme portfolios (Sharpe ratio driven, skewness driven, or kurtosis driven) and avoid the middle ground. This “all-or-nothing” characteristic is reflected in jumps of asset weights when certain thresholds of preference parameters are crossed. These empirical findings can explain why many investors are so reluctant to implement option-based short-selling strategies.

Herd behaviour in buyout investments

In this study, we explored the presence of correlated investment choices (i.e., herd behaviour) among international buyout funds by distinguishing among the contemporaneous and the following herding of smaller funds towards the top market players (i.e., the top quartile in terms of the fund size). In our analyses, we found that the industry herding towards the largest ones is common in private equity (PE) but mostly during market contractions or the deterioration of general market conditions. Moreover, we also found that as capital inflows into the PE industry slow down, herding occurs more often. This finding is consistent with the increasing competition for new capital fundraising in downturns, which can induce PE funds to herd more. We also found that both types of herding generate higher fund returns and lower risk for funds that are capable of herding. Additionally, we documented the persistence in herding.     

创业之忌讳

要开始创业,最需要注意和最忌讳的是什么呢?一是没有足够的资金;二是没有赚钱的好方法;三是没有十足的信心;四是没有敢闯的勇气;五是没有强大的竞争对手;六是没有彼此互信的伙伴;     

Local bias in venture capital investments

This paper examines local bias in the context of venture capital (VC) investments. Based on a sample of U.S. VC investments between 1980 and June 2009, we find more reputable VCs (older, larger, more experienced, and with stronger IPO track record) and VCs with broader networks exhibit less local bias. Staging and specialization in technology industries increase VCs' local bias. We also find that the VC exhibits stronger local bias when it acts as the lead VC and when it is investing alone. Finally, we show that distance matters for the eventual performance of VC investments.     

Staged Financing of Start-ups

From a theoretical perspective, staged financing of start-ups mainly serves to reduce agency risks for investors dealing with founders. This risk reduction is partly offset by the transaction costs caused by staged financing. From the perspective of founders, staging can reduce the cost of equity, but it also increases the share of external company and market risks they have to bear. Our empirical study of a sample of German start-ups confirms the importance of transaction costs and shifting external risk for staging decisions, but does not support agency theoretical explanations of staged financing.     

Debtor-in-possession financing

Several recent papers have documented the benefits of debtor-in-possession (DIP) financing in the restructuring of firms in Chapter 11. However, the view on benefits is not unanimous and some legal scholars have raised doubts about DIP financing's effects on debt-holders and the possibility of expropriative wealth transfers. In this paper we address this issue by analyzing both stock and bond price data for a comprehensive sample of DIP loans and find significant positive abnormal stock and bond returns at the announcement of DIP loans. Also, we do not find evidence of wealth transfers from junior to senior debt-holders. Further, we examine the DIP loan process in detail and we document important institutional features of DIP loans such as maturity, covenants, fees and interest charges. We find evidence of intense monitoring using covenants. We also find higher fees and charges associated with DIP loans. We argue that overall the results are consistent with the information processing role of financial intermediaries.     

Multi-track financing

In today's uncertain economic environment, when seeking to finance a capital project, healthcare borrowers should adopt a multi-tracked funding strategy that permits them to change capital-funding routes quickly in response to changing circumstances. The multi-tracking process requires two stages prior to securing a commitment and beginning the closing process: due diligence and indication of interest. This process should present no material additional cost during these two stages, giving healthcare borrowers the flexibility to explore a variety of financing options.     

Predicting success in entrepreneurial finance research

We study the relationship between buyout and venture capital (VC) funds’ returns, and more typically available proxies—exits via M&A or IPO. We further explore the effects of filters on the selection of M&As and IPOs (to emphasize successes), on the relationship. We show that some of these filters can reduce the count of exits by as much as 80% without significantly improving the correlation between exits and fund returns. We also show that for venture capital funds, counting acquisitions that are at least twice the amount of funding raised results in the best correlation between exits via an acquisition and fund returns. Finally, when the sample comprises young startups – that are perhaps not yet ready for any form of exit – follow-on funding, employment, website ranking, and patent activity can be used as proxies for exits in place of IPOs or acquisitions.     

The role of accounting in high-technology investments

We present new qualitative empirical evidence from a series of interviews with representatives of venture capital support organisations, which discusses the role of accounting in high-technology investments. Our discussion is framed around three propositions on: whether or not the stewardship role of accounting still holds; the usefulness, or otherwise, of accounting information in the valuation of high-technology investments; and assessing the value of intangible assets in the investment decision. We find that accounting no longer plays such a strong stewardship role, certainly for the venture capital investor. Further, its role in enabling investors to make decisions on how, when and how much to invest is limited. We propose that standard setters take this on board in revising reporting requirements.     

Contracts and returns in private equity investments

We analyze the relationship between contracts and returns in private equity (PE) investments. Contractual control in the form of covenants tends to be employed to identify good deals. Better quality firms are more likely to have covenant-rich contracts, as they are less concerned by the constraints imposed by the covenants. PE investors appoint closer associates of the fund in deals that are performing poorly but tend to outsource board governance in better deals. Collectively, our evidence suggests that PE investors operate along two dimensions, choosing covenants and board seats differently, based on the ex ante quality of the company.     

Fixed costs and long-lived investments

Fixed costs models are difficult to analyze because they feature non-degenerate, time-varying distributions of capital across firms. If investments are sufficiently long-lived however then the cross-sectional distribution of capital holdings has virtually no bearing on the equilibrium and the aggregate behavior of fixed-cost models is essentially identical to neoclassical models. The findings are due to a near infinite elasticity of investment timing for long-lived investments – a feature shared by fixed-cost models and neoclassical models. “Irrelevance results” found in numerical studies of fixed-cost models are not parametric special cases but instead are fundamental properties of models with long-lived investment goods.     

Childhood investments and skill formation

The skills needed to ensure good life chances are rising (and changing) and, despite decades of education reforms, there has been little progress in terms of equalizing opportunities. The impact of social origins on child outcomes persists, and may even strengthen. This suggests that the pursuit of more equality and future productivity come together. A major challenge is to minimize the dispersion of skills. The foundations of policy lie in the realization that learning abilities are formed during the first years of childhood. The pursuit of an optimal human capital policy needs to consider three issues: (1) the uneven capacity of parents to invest in children; (2) the impact of mothers’ employment on child outcomes; and, (3) the potential benefits of early pre-school programmes.     

外资青睐中国

世界著名的管理顾问公司科尔尼公司日前公布了其最新的外国直接投资(Foreign Direct Investment,简称FDI)信心指数调查结果,这份调查全球1000名首席执行官而得出的报告指出,中国首次超过美国成为最有吸引力的外国直接投资目的国.     

A call on art investments

The art market has seen several booms and busts during the last 20 years and, despite its recent downturn, has received more attention from investors given the low interest environment following the financial crisis. However, participation has been reserved for a few investors and the hedging of exposures remains difficult. This paper proposes to overcome these problems by introducing a call option on an art index, derived from one of the most comprehensive data sets of art market transactions. The option allows investors to optimize their exposure to art. For pricing purposes, non-tradability of the art index is acknowledged and option prices are derived in an equilibrium setting as well as by replication arguments. In the former, option prices depend on the attractiveness of gaining exposure to a previously non-traded risk. This setting further overcomes the problem of art market exposures being difficult to hedge. Results in the replication case are primarily driven by the ability to reduce residual hedging risk. Even if this is not entirely possible, the replication approach serves as a pricing benchmark for investors who are significantly exposed to art and try to hedge their art exposure by selling a derivative.