Why do venture capital firms exist? theory and canadian evidence

This paper investigates the role of venture capitalists. We view their “raison d’être” as their ability to reduce the cost of informational asymmetries. Our theoretical framework focuses on two major forms of asymmetric information: “hidden information” (leading to adverse selection) and “hidden action” (leading to moral hazard). Our theoretical analysis suggests four empirical predictions.1. Venture capitalists operate in environments where their relative efficiency in selecting and monitoring investments gives them a comparative advantage over other investors. This suggests strong industry effects in venture capital investments. Venture capitalists should be prominent in industries where informational concerns are important, such as biotechnology, computer software, etc., rather than in “routine” start-ups such as restaurants, retail outlets, etc. The latter are risky, in that returns show high variance, but they are relatively easy to monitor by conventional financial intermediaries.2. Within the class of projects where venture capitalists have an advantage, they will still prefer projects where monitoring and selection costs are relatively low or where the costs of informational asymmetry are less severe. Thus, within a given industry where venture capitalists would be expected to focus, we would also expect venture capitalists to favor firms with some track records over pure start-ups. To clarify the distinction between point 1 and point 2, note that point 1 states that if we look across investors, we will see that venture capitalists will be more concentrated in areas characterized by significant informational asymmetry. Point 2 says that if we look across investment opportunities, venture capitalists will still favor those situations which provide better information (as will all other investors). Thus venture capitalists perceive informational asymmetries as costly, but they perceive them as less costly than do other investors.3. If informational asymmetries are important, then the ability of the venture capitalist to “exit” may be significantly affected. Ideally, venture capitalists will sell off their share in the venture after it “goes public” on a stock exchange. If, however, venture investments are made in situations where informational asymmetries are important, it may be difficult to sell shares in a public market where most investors are relatively uninformed. This concern invokes two natural reactions. One is that many “exits” would take place through sales to informed investors, such as to other firms in the same industry or to the venture’s own management or owners. A second reaction is that venture capitalists might try to acquire reputations for presenting good quality ventures in public offerings. Therefore, we might expect that the exits that occur in initial public offerings would be drawn from the better-performing ventures.4. Finally, informational asymmetries suggest that owner-managers will perform best when they have a large stake in the venture. Therefore, we can expect entrepreneurial firms in which venture capitalists own a large share to perform less well than other ventures. This is moral hazard problem, as higher values of a venture capitalist’s share reduce the incentives of the entrepreneur to provide effort. Nevertheless, it might still be best in a given situation for the venture capitalist to take on a high ownership share, since this might be the only way of getting sufficient financial capital into the firm. However, we would still expect a negative correlation between the venture capital ownership share and firm performance.Our empirical examination of Canadian venture capital shows that these predictions are consistent with the data. In particular, there are significant industry effects in the data, with venture capitalists having disproportionate representation in industries that are thought to have high levels of informational asymmetry. Secondly, venture capitalists favor later stage investment to start-up investment. Third, most exit is through “insider” sales, particularly management buyouts, acquisitions by third parties, rather than IPOs. However, IPOs have higher returns than other forms of exit. In addition, the data exhibit the negative relationship between the extent of venture capital ownership and firm performance predicted by our analysis.     

On the cost of delayed currency fixing announcements

In Foreign Exchange Markets vanilla and barrier options are traded frequently. The market standard is a cutoff time of 10:00 a.m. in New York for the strike of vanillas and a knock-out event based on a continuously observed barrier in the inter bank market. However, many clients, particularly from Italy, prefer the cutoff and knock-out event to be based on the fixing published by the European Central Bank on the Reuters Page ECB37. These barrier options are called discretely monitored barrier options. While these options can be priced in several models by various techniques, the ECB source of the fixing causes two problems. First of all, it is not tradable, and secondly it is published with a delay of about 10–20 min. We examine here the effect of these problems on the hedge of those options and consequently suggest a cost based on the additional uncertainty encountered.      

Modelling Hospital Admission and Length of Stay by Means of Generalised Count Data Models

For a large heterogeneous group of patients, we analyse probabilities of hospital admission and distributional properties of lengths of hospital stay conditional on individual determinants. Bayesian structured additive regression models for zero‐inflated and overdispersed count data are employed. In addition, the framework is extended towards hurdle specifications, providing an alternative approach to cover particularly large frequencies of zero quotes in count data. As a specific merit, the model class considered embeds linear and nonlinear effects of covariates on all distribution parameters. Linear effects indicate that the quantity and severity of prior illness are positively correlated with the risk of hospital admission, while medical prevention (in the form of general practice visits) and rehabilitation reduce the expected length of future hospital stays. Flexible nonlinear response patterns are diagnosed for age and an indicator of a patients' socioeconomic status. We find that social deprivation exhibits a positive impact on the risk of admission and a negative effect on the expected length of future hospital stays of admitted patients. Copyright © 2015 John Wiley & Sons, Ltd.     

Eurokrise: Erneute Atempause ist kein Grund zum Ausruhen

The current state of affairs in the euro area (EA) instills hope in economic recovery but also substantial concern. The crisis countries have made considerable, albeit quite uneven, progress in central areas of reform. Yet severe obstacles remain. Moreover, European policy makers have reformed the EA’s institutional framework to strengthen its resilience. Yet important elements of a stable architecture are still missing, and it remains unclear whether the EA is moving towards full integration or a Maastricht 2.0. Most importantly, since it has become impossible to construct a viable fi scal bridge due to the success of the OMT programme, now everything depends on the perseverance of domestic reform policies.     

Tobacco and alcohol: complements or substitutes?

The question of whether alcohol and tobacco are consumed as complements or substitutes is crucial for determining the side-effects of anti-smoking policies. Numerous papers have empirically addressed this issue by estimating demand systems for alcohol and tobacco, and subsequently calculating cross-price effects. However, this traditional approach is often seriously hampered by insufficient price variation observed in survey data. We, therefore, suggest an alternative instrumental variables approach that statistically mimics an experimental study and does not rely on prices as explanatory variables. This approach is applied by means of German survey data. Our estimation results suggest that a reduction in tobacco consumption results in a moderate reduction in alcohol consumption. It is demonstrated that this implies that alcohol and tobacco are complements. Hence, we conclude that successful anti-smoking policies will not result in the unintended side-effect of an increased (ab)use of alcohol.     

Experimental evidence that quorum rules discourage turnout and promote election boycotts

Many democratic decision making institutions involve quorum rules. Such rules are commonly motivated by concerns about the “legitimacy” or “representativeness” of decisions reached when only a subset of eligible voters participates. A prominent example of this can be found in the context of direct democracy mechanisms, such as referenda and initiatives. We conduct a laboratory experiment to investigate the consequences of the two most common types of quorum rules: a participation quorum and an approval quorum. We find that both types of quora lead to lower participation rates, dramatically increasing the likelihood of full-fledged electoral boycotts on the part of those who endorse the Status Quo. This discouraging effect is significantly larger under a participation quorum than under an approval quorum.     

Determinants of Relative Sectoral Prices: The Role of Demographic Change

Demographic change raises demand for non‐tradable old‐age related services relative to tradable commodities. This demand shift increases the relative price of non‐tradables and thereby causes real exchange rates to appreciate. We claim that the change in demand affects prices via imperfect intersectoral factor mobility. Using a sample of 15 OECD countries, we estimate a robust increase of relative prices. According to our main estimate, up to one fifth of the average increase in relative prices between 1970 and 2009 can be attributed to population ageing. Further findings confirm the relevance of imperfect factor mobility: Countries with more rigid labour markets experience stronger price effects.     

A Note on Forecasting Emerging Market Exchange Rates: Evidence of Anti‐herding

Using survey forecasts of a large number of Asian, European, and South American emerging market exchange rates, we studied empirically whether evidence of herding or anti‐herding behavior of exchange‐rate forecasters can be detected in the cross‐section of forecasts. Emerging market exchange‐rate forecasts are consistent with herding (anti‐herding) if forecasts are biased towards (away from) the consensus forecast. Our empirical findings provide strong evidence of anti‐herding of emerging market exchange‐rate forecasters.