Nearly all the research detailed below relies on the generous access to the VentureSource database provided by Dow Jones and Correlation Ventures.
Statistical Discrimination or Prejudice? A Large Sample Field Experiment (with C. Wang and B. Tomlin) [Forthcoming, Review of Economics and Statistics] [pdf]
A model of racial discrimination provides testable implications for two features of statistical discriminators: differential treatment of signals by race and heterogeneous experience that shapes perception. We construct an experiment in the U.S. rental apartment market that distinguishes statistical discrimination from taste-based discrimination. Responses from over 14,000 rental inquiries with varying applicant quality show that landlords treat identical information from applicants with African-American and white sounding names differently. This differential treatment varies by neighborhood racial composition and signal type in a way consistent with statistical discrimination and in contrast to patterns predicted by a model of taste-based discrimination.
The Price of Diversifiable Risk in Venture Capital and Private Equity (with C. Jones and M. Rhodes-Kropf) [Apr. 2013, Forthcoming, Review of Financial Studies] [pdf]
This paper demonstrates how the principal-agent problem between venture capitalists and their investors (limited partners) causes limited partner returns to depend on diversifiable risk. Our theory shows why the need for investors to motivate VCs alters the negotiations between VCs and entrepreneurs and changes how new firms are priced. The three-way interaction rationalizes the use of high discount rates by VCs and predicts a correlation between total risk and net of fee investor returns. We take our theory to a unique data set and find empirical support for the effect of the principal-agent problem on equilibrium private equity asset prices.
Is the VC Partnership Greater than the Sum of its Partners? (with M. Rhodes-Kropf) [Jan. 2013, Revise and Resubmit] [pdf]
This paper investigates whether individual venture capitalists have repeat- able investment skill and to what extent their skill is impacted by the VC firm where they work. We examine a unique dataset that tracks the performance of individual venture capitalists’ investments across time and as they move between firms. We find evidence of skill differences and exit style differences even among venture partners investing while employed at the same VC firm at the same time. Furthermore, our estimates suggest the partner’s human capital is two to five times more important than the VC firm’s organizational capital in explaining performance.
From Employee to Founder: Changes in Innovation After Entrepreneurial Firm Founding (with Christian Fons-Rosen) [Jan. 2013] [email for draft]
How does the innovative activity of the entrepreneurial and established firm differ? The movement of inventors between these two types of firms can provide an answer. With data on entrepreneurial firm founder mobility and patenting, we compare their innovative activity to a matched set of inventors with whom they have co-authorship and co-worker connections. Founders and past co-authors have very similar pre-trends in major patent variables. Five years after founding, difference-in-difference estimates show that the entrepreneurial founder produces 30% more patents with a more narrow industry focus than those of her past co-workers, while the patents receive more citations. Furthermore, the founder’s post-exit patents cite pre-exit patents at a relatively higher rate, demonstrating close connections between the entrepreneurial and established firm.
Does Security Choice Matter in Venture Capital? The Case of Venture Debt (with I. Chakraborty) [July 2012] [pdf]
The switch from equity to debt in venture capital-backed entrepreneurial firms is rare, but uniquely informative. Using a novel dataset of financing decisions, we find that entrepreneurial firms that raise debt financing suffer from an average 40% post-debt valuation drop and a 26% lower probability of successful exit (IPO/acquisition). Venture capitalists with equity stakes lend to lower quality entrepreneurial firms compared to outside lenders, and debt from both precedes deterioration in firm quality. Our results do not imply that debt causes negative outcomes. Rather, we argue that debt helps maintain incentive alignment after adverse shocks to firm quality.
Work in Progress
“The Changing Face of the VC-Backed Entrepreneur” (with Ramana Nanda and Matthew Rhodes-Kropf)
“The Effect of Disclosure on Firm Behavior: Evidence from Deregistrations of Small Banks” (with Pierre Lang)