Managing Performance Signals Through Delay: Evidence from Venture Capital

This paper examines whether agency conflicts during venture capital (VC) fundraising impact investment behavior. Using novel investment-level decisions of VCs in the process of raising new funds, we find that venture capitalists take actions hidden from their investors—i.e., limited partners (LPs)—that delay revealing negative information about VC fund performance until after a new fund is raised. After fundraising is complete, write-offs double and reinvestments in relatively worse-off entrepreneurial firms increase. We find that these observations cannot be explained by strategic bundling of news or effort constraints due to the newly raised fund. Funds with both long and short fundraising track record exhibit this behavior and the delay is costly for fund investors (LPs). This strategic delay shows that fundraising incentives have real impacts on VC fund investment decisions, which are often difficult for LPs to observe

Does shareholder coordination matter? Evidence from private placements

We propose a new role for private investments in public equity (PIPEs) as a mechanism to reduce coordination frictions among existing equity holders. We establish a causal link between the coordination ability of incumbent shareholders and PIPE issuance. This result obtains even after controlling for alternative explanations such as information asymmetry and access to public markets. Improved equity coordination following a private placement leads to favorable debt renegotiations within one year of issuance. Mitigating coordination frictions among shareholders ultimately decreases the odds of firm default in half

Marriage stability, taxation and aggregate labor supply in the U.S. vs. Europe

Americans work more than Europeans. Using micro-data from the United States and 17 European countries, we document that women are typically the largest contributors to the cross-country differences in work hours. We also show that there is a negative relation between taxes and annual hours worked, driven by men, and a positive relation between divorce rates and annual hours worked, driven by women. In a calibrated life-cycle model with heterogeneous agents, marriage and divorce, we find that the divorce and tax mechanisms together can explain 45% of the variation in labor supply between the United States and the European countries

Facilitating audits of clinical trial data using documents of the Food and Drug Administration

The Medical Review document of the FDA is a rich source of data about clinical trials underlying the approval of a given drug. There are also other sources of information about clinical trials, such as trial registries and publications. However the data in the various sources may be erroneous or discrepant, and therefore there have been calls for audits of data in trial registries, in particular. The data in the Medical Review documents could be used as a source, to cross check data from other sources. However, it is extremely cumbersome to access the data in this document. We have analyzed the summary 'Table of Clinical Studies' of forty five Medical Reviews, and note significant differences in what information is presented in this table. We outline the details of an informative template Table, that would facilitate audits

Financial Statement Complexity and Bank Lending

Recent studies and anecdotal evidence suggest that investors struggle to process complex financial reports. Existing theory and evidence demonstrate that banks not only have unique advantages in acquiring information, relative to equity and public debt investors, but also can impose contractual terms to mitigate information frictions. We investigate whether financial statement complexity is associated with firms' reliance on bank financing and with the terms of bank loans (i.e., the amount and rate of the loan, along with covenants and collateral). We focus on two dimensions of complexity that capture the volume and presentation of financial information: 10-K length and readability. We find that complexity is positively associated both with firms' reliance on bank financing and with banks increasing their level of screening, rationing their credit supply, and imposing tighter covenants. Our results suggest that banks continue to play their role as informed capital providers in a changing economy, characterized by growing financial statement complexity and innovations in banks' business models

Agency Problems in Corporate Finance

I investigate: (i) Agency problems between debt and equity holders, and their impact on capital structure and investment policy; (ii) Agency problems between firm managers and capital providers. The first chapter, Investment and Financing under Reverse Asset Substitution , shows that banks place investment and borrowing restrictions on firms that are in lending relationships even when firms face no risk of bankruptcy, in order to continue extracting surplus from the firms over multiple periods. This agency problem is especially severe for firms that suffer from larger information asymmetries with the credit market. I use the term Reverse Asset Substitution (RAS) to express this partial transfer of control that benefits banks at the expense of equity holders of the firm. Using six different approaches, including triple difference in difference, Instrumental Variables, Propensity Score Matching and Endogenous Self-Selection, I provide empirical evidence consistent with the existence of RAS. I find that firms enjoying perfect competition in credit supply invest 2% more in PP&E than firms facing a monopoly in credit supply by banks. RAS reduces firmgrowth (11% lower PP&E) and leverage (24% lower). In the chapter titled Heterogeneity in Corporate Governance: Theory and Evidence , I propose that the amount of management autonomy in a firm is chosen as a best response to exogenous firmcharacteristics, such as output variance. Shareholders in firms with higher exogenous variance attempt to reduce the information disadvantage they face by reducing autonomy of management. In addition, I find that over time, this information gap has decreased in US capital markets, and since Sarbanes-Oxley the information asymmetry does not play a role in the choice of corporate governance mechanisms. In the last chapter, Effort, Risk and Walkaway under High Water Mark Style Contracts , Sugata Ray begin_of_the_skype_highlighting end_of_the_skype_highlighting and I model a hedge fund style compensation contract in which management fees, incentive fees and a high water mark (HWM) provision drive a fund manager’s effort and risk choices aswell as walkaway decisions by both the fund manager and the investor.Welfare results for the calibrated model show that a higher management fee and lower incentive fee (e.g. a 2.5/10 contract) lead to Pareto improvement