Investor Tax Credits and Entrepreneurship: Evidence from U.S. States |
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| Authors: | MATTHEW DENES SABRINA T. HOWELL FILIPPO MEZZANOTTI XINXIN WANG TING XU |
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| Affiliation: | 1. Correspondence: Sabrina T. Howell, New York University, Stern School of Business, 44 West Fourth Street, New York, NY 10012;2. e-mail: sabrina.howell@nyu.edu.;3. Matthew Denes is at the Carnegie Mellon University Tepper School of Business. Sabrina T. Howell is at the New York University Stern School of Business. Filippo Mezzanotti is at the Northwestern University Kellogg School of Management. Xinxin Wang is at the UCLA Anderson School of Management. Ting Xu is at the University of Toronto Rotman School of Management. This paper subsumes two prior working papers: Denes, Wang, and Xu ( 2019) and Howell and Mezzanotti ( 2019). We thank Jim Albertus;4. Tania Babina;5. Laurent Bach;6. Shai Bernstein;7. Greg Brown;8. Annamaria Conti;9. Jesse Davis;10. Ryan Decker;11. Mike Ewens;12. Joan Farre-Mensa;13. Paolo Fulghieri;14. Andra Ghent;15. Juanita Gonzalez-Uribe;16. Will Gornall;17. Apoorv Gupta;18. Arpit Gupta;19. Jorge Guzman;20. Thomas Hellmann;21. Yael Hochberg;22. Edith Hotchkiss;23. Yunzhi Hu;24. Jessica Jeffers;25. Simone Lenzu;26. Josh Lerner;27. Song Ma;28. David Matsa;29. Arnobio Morelix;30. Holger Mueller;31. Ramana Nanda;32. Daniel Paravisini;33. Andrea Passalacqua;34. David Robinson;35. Pian Shu;36. Morten Sorenson;37. Denis Sosyura;38. Chester Spatt;39. Luke Stein;40. Kairong Xiao;41. Emmanuel Yimfor;42. Linghang Zeng;43. Eric Zwick;44. and seminar participants at the Third Junior Entrepreneurial Finance and Innovation Workshop, Eighth HEC Paris Workshop on Entrepreneurship, AFA, ASU Sonoran Winter Finance Conference, Barcelona GSE Summer Forum, Bocconi, Carnegie Mellon University, Duke-UNC Innovation and Entrepreneurship Research Symposium, Finance in the Cloud II, Jackson Hole Finance Group Conference, Kellogg, Kenan Institute Frontiers of Entrepreneurship Conference, MFA, Mid-Atlantic Research Conference in Finance, Northeastern Finance Conference, NBER Conference on Business Taxation in a Federal System, NTU, NYU Stern Corporate Governance Seminar, Red Rock Finance Conference, Southern California PE Conference, Texas A&M, UCLA, UNC Entrepreneurship Working Group, UVA Darden, WFA, and Young Scholar in Finance Consortium for helpful comments. We thank Abhishek Bhardwaj, Grant Goehring, Michael Gropper, Sunwoo Hwang, Nick McMonigle, Danye Wang, and Jun Wong for excellent research assistance. Howell's research on this project was funded by the Kauffman Foundation and the UNC Kenan Institute. We have read The Journal of Finance's disclosure policy and have no conflicts of interest to disclose. |
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| Abstract: | Angel investor tax credits are used globally to spur high-growth entrepreneurship. Exploiting their staggered implementation in 31 U.S. states, we find that they increase angel investment yet have no significant impact on entrepreneurial activity. Two mechanisms explain these results: crowding out of alternative financing and low sensitivity of professional investors to tax credits. With a large-scale survey and a stylized model, we show that low responsiveness among professional angels may reflect the fat-tailed return distributions that characterize high-growth startups. The results contrast with evidence that direct subsidies to firms have positive effects, raising concerns about promoting entrepreneurship with investor subsidies. |
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