Is IPO Underperformance a Peso Problem?

Recent studies suggest that the underperformance of IPOs in the post-1970 sample may be a small sample effect or %u201CPeso%u201D problem. That is, IPO underperformance may result from observing too few star performers ex-post than were expected ex-ante. We develop a model of IPO performance that captures this intuition by allowing returns to be drawn from mixtures of outstanding, benchmark, or poor performing states. We estimate the model under the null of no ex-ante average IPO underperformance and construct small sample distributions of various statistics measuring IPO relative performance. We find that small sample biases are extremely unlikely to account for the magnitude of the post-1970 IPO underperformance observed in data.

Patent collateral, investor commitment, and the market for venture lending

This paper investigates the market for lending to technology startups (i.e., venture lending) and examines two mechanisms that may facilitate trade within it: (1) the ‘salability’ of patent collateral; and (2) the credible commitment of existing equity investors. We find that intensified trading in the secondary patent market is strongly related to the annual rate of startup lending, particularly for startups with more redeployable patent assets. Moreover, we show that the credibility of venture capitalist commitments to reinvest in their startups’ next round of financing can be critical for startup debt provision. Utilizing the crash of 2000 as a severe and unexpected capital supply shock for VCs, we show that lenders continue to finance startups with recently funded investors better able to credibly commit to refinance their portfolio companies, but withdraw from otherwise-promising projects that may have needed their funds the most. The findings are consistent with predictions of incomplete contracting and financial intermediation theory.Accepted manuscrip

A Lobbying Approach to Evaluating the Sarbanes-Oxley Act of 2002

We evaluate the net benefits of the Sarbanes-Oxley Act (SOX) for shareholders by studying the lobbying behavior of investors and corporate insiders to affect the final implemented rules under the Act. Investors lobbied overwhelmingly in favor of strict implementation of SOX, while corporate insiders and business groups lobbied against strict implementation. We identify the firms most affected by the law as those whose insiders lobbied against strict implementation, and compare their returns to the returns of less affected firms. Cumulative returns during the four and a half months leading up to passage of SOX were approximately 10 percent higher for corporations whose insiders lobbied against one or more of the SOX disclosure-related provisions than for similar non-lobbying firms. Analysis of returns in the post-passage implementation period indicates that investors' positive expectations with regards to the effects of the law were warranted for the enhanced disclosure provisions of SOX.

Local Overweighting and Underperformance: Evidence from Limited Partner Private Equity Investments

Institutional investors of all types exhibit substantial home-state bias when investing in private equity (PE) funds. This effect is particularly pronounced for public pension funds, where the local overweighting amounts to 9.7% of the private equity portfolio on average, based on 5-year rolling average benchmarks. Public pension funds’ own-state investments perform significantly worse than their out-of-state investments, an average of 3-4 percentage points of net IRR per year, and those that that overweight their portfolios towards home-state investments also perform worse overall. These underperformance patterns are not evident for other types of institutional investors, such as endowments, foundations and corporate pension funds, and we do not observe similar overweighting or underperformance of investments in neighboring states. Overweighting in home state investments by public pension funds is greater in states with higher levels of corruption, although there is no positive correlation of underperformance with corruption for these investors. The overweighting and underperformance of local investments cost public pension funds between $0.9 and$1.2 billion per year, depending on the benchmark.

Informational Hold-up and Performance Persistence in Venture Capital

Why don't successful venture capitalists eliminate excess demand for their follow-on funds by aggressively raising their performance fees? We propose a theory of learning that leads to informational hold-up in the VC market. Investors in a fund learn whether the VC has skill or was lucky, whereas potential outside investors only observe returns. This gives the VC's current investors hold-up power when the VC raises his next fund: Without their backing, he cannot persuade anyone else to fund him, since outside investors would interpret the lack of backing as a sign that his skill is low. This hold-up power diminishes the VC's ability to increase fees in line with performance. The model provides a rationale for the persistence in after-fee returns documented by Kaplan and Schoar (2005) and predicts low expected returns among first-time funds, persistence in investors from fund to fund, and over-subscription in follow-on funds raised by successful VCs. Empirical evidence from a large sample of U.S. VC funds raised between 1980 and 2006 is consistent with these predictions

Informational Hold-up and Performance Persistence in Venture Capital

Why don't successful venture capitalists eliminate excess demand for their follow-on funds by aggressively raising their performance fees? We propose a theory of learning that leads to informational hold-up in the VC market. Investors in a fund learn whether the VC has skill or was lucky, whereas potential outside investors only observe returns. This gives the VC's current investors hold-up power when the VC raises his next fund: Without their backing, he cannot persuade anyone else to fund him, since outside investors would interpret the lack of backing as a sign that his skill is low. This hold-up power diminishes the VC's ability to increase fees in line with performance. The model provides a rationale for the persistence in after-fee returns documented by Kaplan and Schoar (2005) and predicts low expected returns among first-time funds, persistence in investors from fund to fund, and over-subscription in follow-on funds raised by successful VCs. Empirical evidence from a large sample of U.S. VC funds raised between 1980 and 2006 is consistent with these predictions