Impact of war on entrepreneurial activity

While previous studies have investigated the economic costs of conflict in terms of the GDP per capita, there is no research that assesses the aggregate economic costs of conflict in terms of (lost) entrepreneurship. This void is surprising given that entrepreneurial activity is an important driver of job creation and economic growth in the long run.

Some studies have investigated how entrepreneurs are affected by violent conflict. Quite surprisingly, those studies seem to suggest a positive correlation between violent conflict and entrepreneurial activity (although most are qualitative and or poorly identified, so that the reported findings must be interpreted with caution).

Our new study explores the impact of the Russia-Ukraine conflict that started in 2014 with the invasion of Crimea. Using the synthetic control method to construct counterfactuals of how entrepreneurial activity would have evolved in Russia and Ukraine in the hypothetical absence of the war, we find clear evidence that both countries lost entrepreneurial activity, as measured by self-employment and Small and Medium-sized Enterprises (SMEs).

In Ukraine, the percentage of self-employed dropped sharply by 19.5% in the first conflict year, leading to the unemployment of 675 thousand formerly self-employed Ukrainians. The effect partially subsides over time, but foregone entrepreneurship still accounts for 8% in the fifth conflict year. The difference in SMEs with its synthetic version peaks in 2016, with a gap of 71 thousand SMEs corresponding to a relative loss of 14%, and recovers back to the synthetic trajectory five years into the war. Putin’s war is eroding Russia’s future prospects

In Russia, the effect is persistent and reinforcing over time, with the number of SMEs dropping by 42.2%, accounting for a loss of 1.4 million SMEs. The disappearance of Russian SMEs results from fewer new business creations and more existing business closures.

We also see that the trends in entrepreneurial activity are plausibly affected by the sanctions imposed on Russia by the European Union in 2016. In Russia, entrepreneurial activity declined further after 2016. In contrast, Ukraine seems to recover from the initial shock starting in 2016, and entrepreneurial activity started climbing (almost) back to its pre-war level until 2019.

The study contributes to the literature on the economic costs of war by challenging the scholarly consensus that conflict spurs entrepreneurship. It also offers an empirical basis for policy debates around the Russia-Ukraine conflict.

The study’s conclusions that Ukraine recovers and Russia further erodes its entrepreneurial base have important implications for the economy. Putin’s war is essentially eroding Russia’s economic substance of the future.

Freedom gets a lot of lip service. Nearly every country on earth has ratified the UN International Covenant on Economic, Social and Cultural Rights. Among other things, it commits signatories to “respect the freedom indispensable for scientific research and creative activity”.

But on 2 March this year’s update to the Academic Freedom Index reported that, for more than half the world’s population, academic freedom is falling. The AFI, produced by the V-Dem institute in Gothenburg, is based upon assessments from more than 2,000 experts worldwide, resulting in a score ranging from zero…

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Although this decline is concerning for multiple reasons, in our recent study we focus on the tangible costs that it may impose on technological change and ask if diminished academic freedom hinders the inventiveness of those countries burdened by a deterioration in academic freedom?

Freedom, generally, has long been recognized in economic thought as a source of growth. Free-market societies develop faster because freedom spurs innovation. Institutions that allow for free cooperation and competition promote knowledge production and exploitation. Independence from authority and hierarchy fosters an atmosphere of information exchange and tolerance to failures that spurs idea circulation, experimentation, diversity, and creativity, all ultimately inducing innovation. Academic freedom is similarly embedded in ‘scientific norms’. Norms that are key to promoting the kind of unconditional exploration that would not be possible in the private sector, as highly uncertain economic returns and limited appropriability discourage profit-oriented researchers.

Waning Academic Freedom

To gain insight into the decline of academic freedom, we use the 2022 Academic Freedom Dataset from the V-Dem Institute of the University of Gothenburg, the primary and most credentialled international source providing an explicit measurement of the concept of academic freedom. The Academic Freedom Index (AFI) is a country/year metric of academic freedom provided in the 0–1 range, for 175 countries over more than 120 years.

In the last decade, worldwide academic freedom has declined by an average of -0.034. To gain additional insights, we sampled the top 25 leading countries in all sciences. These 25 countries exhibited similar levels of academic freedom in 2021. Looking at the AFI in the same 25 countries ten years earlier (2011), we see that academic freedom improved only in South Korea (+0.07). Fourteen countries remained stable and ten countries experienced a decrease in academic freedom by more than 0.02. Academic freedom plummeted dramatically in the last decade in Brazil (-0.56), Turkey (-0.43), India (-0.39), and Russia (-0.25). Decreases were also exhibited in the USA (-0.15), the UK (-0.13), and China (-0.12). The average level of AFI in the 25 countries increased by +0.42 from 1941 (0.38) to 2001 (0.80), plateaued off around 2002–2007, then decreased by about -0.10 from 2008 to the present. The level of academic freedom registered in 2021 by the 25 leading countries (0.70) is equivalent to that of 1985.

Threats to academic freedom in recent years have come from three main sources. First, some countries have regulations that allow political power to exert direct control over universities. For example, in China, all department chairs and deans are centrally-appointed, and a regulation that mandates a Party-appointed leader in all departments has been enforced since 2013. Second, interest groups moved by moral, religious, or ideological agendas voice concerns and attack professors on social media for their opinions, research, or teaching in controversial areas. Examples include stem cell research, the use of animal models, and, more recently, views on the COVID-19 pandemic. Finally, in some countries, the pursuit of for-profit opportunities in higher education institutions is progressively shifting the governance structures of academia, away from the collegiate model and toward a managerial model, which is more akin to a corporate research culture. This may induce academics to conform to institutional priorities and to eschew research themes that may be disliked by powerful donors and constituents, thus constraining research exploration.

Diminished academic freedom hinders innovation

Our study examines the effect of changes in academic freedom on innovation output, as represented by patents. Patent data are drawn from PATSTAT, the most comprehensive database on worldwide patent activity maintained by the European Patent Office. We measure innovation quantity by the number of patent applications filed in a country/year and innovation quality by the number of citations received by the patents of a country/year in the first 3 years after issuance. The final dataset comprises information on 62.8M patent applications and 36.8M citations related to the 157 countries for which the AFI is available in the time window 1900–2015. (Our dataset is available in the Supplementary Material of our paper).

The association between AFI and innovation quantity and quality is strong: A one standard deviation increase in academic freedom translates into 300 more patent filings and 50 more patent citations per one million inhabitants.

We model the relation between the level of academic freedom by country-year and innovation quantity (Table 1a) and quality (Table 1b), with year and country fixed effects capturing global trends and country differentials in all specifications. To assess the causal impact of academic freedom on innovation quantity and quality, we estimate four versions for each of the two measures of innovation output using 2SLS. In Models (1) and (2), we address concerns about spurious correlations, e.g., that the general level of freedom confounds the measured effect of academic freedom on the innovative performance in a country, and instrument academic freedom with an index of country-year liberal democracy, following Edgell et al. Model (1) uses as instrumental variable the 5-years-lagged country indicator of democracy and Model (2) uses the stock of democracy over the previous 10 years with a depreciation rate of 1%. Models (3) and (4) use values of the academic freedom index in previous years as an instrument to address concerns of reverse causality, i.e., that the inventiveness of a country induces more academic freedom.

Model statistics show that we are able to explain four-fifth and two-thirds of the country-year level variation in patent quantity and quality, respectively. Instrument statistics show that lagged and stock liberal democracy and lagged and stock academic freedom are strong instruments. The magnitude of the effect is relatively stable across the models and specifications.

We estimate a series of additional models to assess the robustness of our results. First, the results are robust to alternative model specifications, such as adding control variables of migration rate and changing the lags of the dependent variables. Second, we check the robustness to possible measurement errors in the AFI measures due to long time-windows and subjective measure. The results are unchanged if we restrict the estimates to the post 1980 period and if we replace the AFI with an objective metric, which captures the state of de jure academic freedom granted by national laws and regulations.

Academic freedom had progressively increased from the 1940s to the 2010s, but it reversed and started to decline in the last decade both at the global level and in the 25 leading countries in science. Our analyses show that academic freedom has a causal impact on innovation. Based on the estimates, the global decline in academic freedom that occurred in the last decade has resulted in a global loss quantifiable in the range of 4.0 to 6.7% fewer patents filed and 5.9 to 23.5% fewer patent citations. Overall, our study is the first to link academic freedom to innovation. Given that economic growth results from technological progress, policymakers concerned about inventive productivity and economic growth may want to improve academic freedom to promote breakthrough inventions in their domestic universities that will ultimately spill-over to industry.

Adam Smith, in his landmark book The Wealth of Nations that laid the foundations for modern economic thought, recognized freedom as a source for economic growth as early as 1776. Free-market societies develop faster because freedom spurs innovation. Institutions that allow for free cooperation and competition promote knowledge production and development. Independence from authority and hierarchy fosters an atmosphere of information exchange and tolerance to failures that spurs idea circulation, experimentation, diversity, and creativity—all ultimately inducing innovation.

Academic freedom is similarly embedded in the norms of science, along with other cornerstones of science such as open disclosure and freedom of critique. These norms are key to promoting the kind of unconditional exploration that fuels science and would not be possible in the private sector, where highly uncertain economic returns and limited appropriability discourage profit-oriented researchers.

However, the relevance of academic freedom for innovation has never been empirically tested. Exploring the relation seems especially important now that academic freedom is increasingly under threat and indicators have registered signs of its decline in the last decade, for the first time in the post–World War II period.

The results from a comprehensive sample covering 92 percent of the overall inventive activity since the beginning of the twentieth century consistently suggest that academic freedom has strong positive effects on both the quantity and the quality of innovation output.

Based on the estimates, the global decline in academic freedom that occurred in the last decade has resulted in a global loss quantifiable in the range of 4.0 to 6.7 percent fewer patents filed and 5.9 to 23.5 percent fewer patent citations.

Overall, the study provides a strong empirical argument for restoring and improving academic freedom in innovation-intensive countries and elsewhere that has rarely been put forth before: economic growth through more and better innovation.

CFs combine sophisticated venture- and hedge-fund style investment strategies, exploiting the fact that even very early-stage tokenized startups can be traded in public secondary markets for tokens. CFs differ from traditional funds in important ways. CFs mostly trade in tokens that are classified as “non-securities,” which exempts them from most securities regulations that traditional funds face, such as the Investment Company Act or the Advisers Act. For example, CFs may raise funds from small, individual investors that are neither accredited nor qualified, resulting in a relatively low-median minimum investment requirement of $100,000 (Crypto Fund Research, 2021). It also exempts CFs from any management and performance fee restrictions chargeable to their investors.

Despite the DeFi promise of perfect disintermediation, CFs may be value-adding if they are able to reduce market frictions and thus improve the DeFi market’s efficiency (e.g., by overcoming asymmetric information and agency problems and reducing participation costs for individual investors).

Because CFs are a novel financial intermediary, research assessing their role in DeFi markets is very limited. Our study exploits a unique dataset combining proprietary performance data of CFs with detailed information on tokenized firms and Initial Coin Offerings (ICOs).

Our analyses reveal three key findings:

First, we examine whether tokenized firms achieve higher valuations when they are backed by CFs during an initial coin offering (ICO). We find that tokenized firms substantially benefit from CF backing. In fact, the average tokenized firm’s valuation roughly doubles if the firm is backed by a CF. The effect is much stronger if the backing CF’s investment strategy resembles that of a venture capital fund, rather than a hedge fund.

Second, we investigate whether CF-backed tokenized firms outperform their peers in the long run. Our results suggest that the average token price of CF-backed firms outperforms that of non-CF-backed firms by 18 percent, as measured by buy-and-hold abnormal returns (BHARs) within the first two years after the token exchange listing. Interestingly, the outperformance effect is stronger if the firm is backed by a hedge-style CF, rather than a venture-style CF.

Third, we shed light on the performance and performance persistence of CFs themselves. We document that CFs outperform the market by 2.69 percent per month, as measured by the traditional CAPM-alpha. CFs’ performance is even persistent over subsequent investment periods, suggesting that their outperformance is due to skill rather than luck.

Finally, we show that all these results – that is, the higher valuations, the long-term outperformance, and the fact that CFs are able to beat the market – are driven by CFs’ investor networks. The more central a CF in the market, the higher the valuation and performance effects. This suggests that access to proprietary information in segmented DeFi markets may be why we see a growing number of CFs in DeFi markets.

Overall, these findings are intriguing because they rationalize the seemingly paradoxical re-introduction of centralized market structures in DeFi markets.

Our study has several important implications for entrepreneurs, investors, and policymakers. For entrepreneurs, securing CF backing is always beneficial, no matter whether it is in the primary or secondary market. In the primary market, entrepreneurs are well-advised to seek backing from venture-style CFs, while endorsements from hedge fund-style CFs pay off more in the secondary market. For individual investors, putting their money into CFs yields higher returns than investing directly in, for example, Bitcoin or Ether. For policymakers, our findings suggest that the token market may to some extent become more efficient on its own because intermediaries reduce costly frictions and have an incentive to do so because they benefit from above-market risk-adjusted returns. Our results also provide a solid empirical basis for policymakers and legislators to help adapt securities laws to the domain of tokens and intermediaries that trade in non-securities, such as crypto funds.

By relying on distributed trust created by blockchains, decentralized fundraising is a way to mitigate frictions in fundraising, make entrepreneurial finance markets more efficient, and promote entrepreneurship and innovation. If DeFi fully kept its promises, its proliferation should have coincided with a reduction in financial intermediation. Against this background, however, DeFi markets have experienced an increasing degree of intermediation, with a new type of intermediary entering the market: so-called Crypto Funds (CFs). The number of newly established CFs has substantially grown, in line with the number of token-based crowdfunding projects. At the end of 2021, more than 850 CFs were active, and their total assets under management globally climbed from $8.3 billion in mid-2018 to $57.5 billion according to the Crypto Fund Research.

CFs combine sophisticated venture- and hedge fund-style investment strategies, exploiting the fact that tokenized startups are traded in public secondary markets. CFs mostly trade in tokens that are classified as non-securities, avoiding most regulations applicable to traditional funds. This largely exempts them from the Investment Company Act and the Advisers Act in the US. For example, CFs can raise funds from small, individual investors, who are not accredited or qualified, resulting in a relatively low minimum investment requirement of $100,000. It also exempts CFs from any management and performance fee restrictions chargeable to their investors.

Based on the theory of financial intermediation, there are good reasons why DeFi has not led to a reduction in intermediation in the entrepreneurial finance market, but simply moved it to other parts of the value chain. For example, ICOs involve substantial investment risk, a high degree of information asymmetry, incentives for moral hazard, and new technological risks. All these frictions increase participation costs to an extent that investors in the crypto market particularly benefit from the CFs’ risk management and liquidity transformation function. CFs use their skills to create token portfolios with relatively stable payoffs (as compared to the high volatility of individual tokens).

Because CFs are a novel financial intermediary, research assessing their role in DeFi markets is very limited. In our new article, we exploit a unique dataset combining proprietary performance data of CFs with detailed information on tokenized firms and ICOs. We address the question of whether CFs, through their intermediation activities, contribute to the overall efficiency of DeFi markets.

Our analyses reveal four important findings.

First, we examine whether tokenized startups achieve higher valuations when they are backed by CFs during an ICO campaign. As expected, we find that tokenized firms substantially benefit from CF backing. The average tokenized firm’s valuation roughly doubles in the presence of CF backing.

Second, we investigate the long-term performance of CF-backed tokenized firms relative to their peers. The average CF-backed firms’ token price outperforms that of non-CF-backed firms by 18% in terms of buy-and-hold abnormal returns within the first two years subsequent to token exchange listing.

Third, we shed light on the performance and performance persistence of CFs themselves. CFs outperform the crypto market by as much as 2.69% per month on a risk-adjusted basis, as measured by the traditional CAPM-alpha. Because capital is likely not allocated purely on a competitive basis in the crypto market, CFs’ performance is also persistent over subsequent investment periods. This suggests that their outperformance is largely driven by skill, rather than luck.

Finally, we show that all these results – the higher startup valuations, their long-term outperformance, and the fact that CFs themselves are able to beat the market – are moderated by a CF’s network centrality. The status associated with a CF’s network centrality offers a certification effect to the invested startup venture, thus creating even stronger valuation and performance effects. This suggests that the privileged access to information in segmented DeFi markets accounts for the growing number of CFs in DeFi markets.

Overall, our findings explain the seemingly paradoxical incorporation of centralized market structures in DeFi markets. For entrepreneurs, investors, and policymakers, our results suggest that securing CF backing is always beneficial, whether in the primary or secondary market. For individual investors, putting money into CFs yields higher risk-adjusted returns than investing in tokens directly, e.g., Bitcoin or Ether. Finally, policymakers and legislators should understand that the token market – at least to some extent – may become more efficient on its own because highly skilled intermediaries contribute to the reduction of costly frictions.

Net capital inflows into sustainability-oriented firms and funds are soaring, and so are the valuations of ESG assets. Yet, the economics of sustainable investing are controversial among practitioners and academics. While many industry reports point to the high net capital inflows and favorable valuations of sustainable assets, financial economists warn that ESG-investing hype could be driven by an unsustainable demand. The current focus on ESG could result in these assets underperforming once the high net-capital inflows begin to subside.

In line with the above skepticism, Schumpeterian economists argue that society will only transition to become more sustainable if new, more sustainable businesses disrupt incumbents via the dynamics of “creative destruction.” Thus, these economists argue that if society aims to achieve the United Nations’ Sustainability Development Goals, the focus needs to be on investing in ESG-oriented startups.

However, the same Schumpeterian economists have yet to answer the question of how to finance sustainability-oriented creative destruction. The problem at the core of the debate is that ESG-oriented startups face several additional constraints without being able to fully appropriate all the positive externalities from the good that they do. For example, a sustainable fishing startup incurs additional costs by getting certified and faces restrictions on where, when, and how to fish, yet it will not fully benefit from the long-term benefits of healthy oceans.

The example illustrates the core problem of ESG-oriented creative destruction: It may simply not be profitable in our capitalist society (at least as long as consumers and investors do not show a greater willingness to pay for more sustainable products). Therefore, large-scale government subsidies might be needed to effect sustainable change.

Our recent research addresses the question of how economically attractive startups are for entrepreneurs and investors. We looked at more than 1,000 crowdfunded projects that sold digital blockchain tokens to fund their ESG-oriented startups. This allowed us to obtain both valuation data during the crowdfunding and performance data after the crowdfunding (because tokens are typically traded in liquid markets). We also developed a machine-learning approach to measure the startups’ ESG properties (which is publicly available via an easy-to-use web app).

Our results reveal a pronounced valuation premium for startups with salient ESG goals. If a startup increases its “ESG-ness” by one standard deviation, it can raise 28 percent more financing. The result is important insofar as it implies that entrepreneurs have a strong economic incentive to adopt ESG goals in the first place, which is consistent with the Schumpeterian view.

Given that investing in sustainable companies is attractive for the average entrepreneur in our sample, the question is whether it is also financially attractive for investors to finance sustainable startups. The answer is: no.

Our study suggests that the more pronounced a startup’s sustainability orientation, the lower the investor returns after the crowdfunding event. Yet, despite the underperformance of ESG-oriented startups, investors still fund them. In fact, our analyses suggest investors are willing to accept financial losses of 16–31 percent per standard-deviation increase in sustainability orientation.

Overall, our study paints a relatively optimistic picture. Although sustainable entrepreneurship leads to relative financial losses for investors, investors are willing to accept underperformance to a certain extent and still reward ESG-oriented entrepreneurs with higher valuations, thus creating an incentive for entrepreneurs to adopt ESG goals in the first place. Therefore, assuming startup investors remain willing to pay for ESG, Schumpeterian dynamics of creative destruction may be a key catalyst for our society to transition to a more sustainable one.

The key take-away for policymakers is simple: ESG-oriented entrepreneurs will help make our society more sustainable for their own sake. If one wants to accelerate this evolution, the best way is through policies that encourage investments in startups.

Crypto funds differ from more traditionally-managed funds in significant ways. For example, CryptoFundResearch reports that 43 percent of all crypto funds do not have physical offices and instead rely on globally distributed teams.

Crypto funds largely operate in a legal gray area because they mostly trade in coins that are classified as non-securities. This feature largely exempts them from many regulations, such as the Investment Company Act and the Advisers Act. As a consequence, they face fewer regulatory restrictions, which helps set them apart from more traditionally-managed funds. For example, crypto funds are not required to restrict their fundraising to qualified or accredited investors, which enables them to raise funds from relatively small investors as well (the crypto fund industry has set the median minimum investment requirement at around USD 100,000). Similarly, there is no applicable regulation that prescribes the management and performance fees crypto funds may charge their investors.

The flip side of a lack of regulation is that crypto funds disclose little information, and hence there is no systematic empirical evidence on the performance of this important new intermediary.

To fill this void, we compiled a unique dataset from various sources that track crypto fund activity and performance over the last four years. Our paper is the first to examine the economics of crypto funds.

Two important empirical patterns emerge from the analyses:

1. Crypto funds underperform the market.

The most striking finding is that crypto funds underperform the market, no matter the benchmark (equally-, value-, and liquidity-weighted crypto market benchmarks). For example, relative to the equally-weighted market benchmark, crypto funds underperform by 21 percent per year. This means that investors are on average better off if they invest in either Bitcoin, Ether, or both.

The result is striking because crypto funds underperform the market even before fees. Considering that most of the funds charge investors substantial fees (most funds charge a performance fee of 20 percent on the profits and a management fee of 2 percent on the assets under management), the underperformance is even more pronounced.

It is true, however, that crypto funds manage market risk for their investors. In periods in which the overall crypto market experiences significant downturns, crypto funds temporarily outperform the market.

1. Crypto fund-backed tokenized firms benefit from the investment.

Although crypto funds underperform the market, crypto fund-backed tokenized firms benefit from the investment in two ways.

First, if crypto funds back token offerings, the post-offering performance of the backed token is significantly better than that of comparable non-backed tokens.

Second, cryptocurrencies in which crypto funds invest in the after-market experience a sharp token price increase over the 10 days after the investment. In fact, the token price starts to increase around five days prior to the crypto fund investment, suggesting that there is some informed trading occurring.

Despite crypto funds’ average underperformance, they may add value for investors. For example, crypto funds return gains to investors with in-kind redistributions, meaning that investors can time their personal tax liability. Gains from crypto funds become taxable only at recognition events; that is, if the token returns are exchanged for fiat currency. This individual timing may thus reduce investors’ aggregate tax liability over time.

Crypto funds might have macroeconomic benefits as well. They bring sophisticated trading strategies to otherwise illiquid entrepreneurial finance markets, which increases efficiency in the market for startup projects, thereby potentially improving the allocation of growth capital to the best projects.

To harvest these potential benefits, the crypto fund industry is urgently in need of a sound regulatory framework. As a recent survey among crypto fund managers shows, legal uncertainty in the U.S. and Europe is a key reason why many crypto funds move to the British Virgin Islands or the Cayman Islands.

However, the economics of sustainable investing are contentious among practitioners and academics. While many industry reports point to the high net capital inflows and favorable valuations of ESG assets, financial economists warn that the sustainable investing hype could be driven by an unsustainable demand effect. The current focus on ESG could result in these assets underperforming once the high net capital inflows begin to subside (and other unsustainable effects, such as “greenwashing,” start to wear out).

In line with the above skepticism, Schumpeterian economists argue that society will only transition to become more sustainable if new, more sustainable businesses disrupt incumbents via the dynamics of “creative destruction.”

However, the same Schumpeterian economists have yet to answer the question of how to finance ESG-oriented creative destruction. The problem at the core of the debate is that sustainability-oriented startups face several additional constraints without being able to fully appropriate all the positive externalities from the good that they do. For example, a sustainable fishing startup incurs additional costs by getting certified and faces restrictions on where, when, and how to fish, yet it will not fully benefit from the long-term benefits of healthy oceans.

The example illustrates the core problem of sustainability-oriented creative destruction: it may simply not be profitable in our capitalist society (at least as long as consumers and investors do not show a greater willingness to pay for more sustainable products). Therefore, large-scale government subsidies may be needed to effect sustainable change.

Our recent research addresses the question of how economically attractive it is for entrepreneurs and investors to engage in sustainable venturing. We looked at more than 1,000 crowdfunded projects that sold digital blockchain tokens to fund their sustainable startups. This allowed us to obtain both valuation data during the crowdfunding and performance data after the crowdfunding (because tokens are typically traded in liquid markets). We also developed a machine-learning approach to measure the startups’ ESG properties (which is publicly available via an easy-to-use web app).

Our results reveal a pronounced valuation premium for startups with salient ESG goals. If a startup increases its “ESG-ness” by one standard deviation, it can raise 28% more financing. The result is important insofar as it implies that entrepreneurs have a strong economic incentive to adopt ESG goals in the first place.

Given that sustainable venturing is attractive for the average entrepreneur in our sample, the question is whether it is also financially attractive for investors to finance sustainable startups. The answer is: no.

Our study suggests that the more pronounced a startup’s sustainability orientation, the lower the investor returns after the crowdfunding event. Yet, despite the underperformance of ESG-oriented startups, investors still fund them. In fact, our analyses suggest investors are willing to accept financial losses of 16–31% per standard-deviation increase in sustainability orientation.

Overall, our study paints a relatively optimistic picture. Although sustainable entrepreneurship leads to relative financial losses for investors, investors are willing to accept underperformance to a certain extent and still reward ESG-oriented entrepreneurs with higher valuations, thus incentivizing entrepreneurs to adopt ESG goals. Therefore, assuming startup investors remain willing to pay for ESG, Schumpeterian dynamics of creative destruction may be a key catalyst for our society to transition to a more sustainable one.

In Europe, policymakers have agreed on a comprehensive bank recovery and resolution regime, which includes the Bank Recovery & Resolution Directive and the Single Resolution Mechanism Regulation, designed to make banks resolvable if they go bankrupt, but also to rule out bailout expectations and implicit government guarantees. The regime is designed to make banks’ debt bail-in-able and to make government bailouts of banks a rare exception.

But is this bail-in regime credible? By tracking market reactions to the implementation of the bank resolution regime and quantifying the impact of key legal events between mid-2009 and mid-2017 on credit default swap (CDS) spreads and equity returns of 260 European banks, in a recent article we conclude that the European bail-in regime alone has not eliminated implicit government guarantees. Worse still, CDS spreads, especially among global systemically important banks, have tightened and equity returns have increased significantly, despite the implementation of the resolution regime.

In other words, the European bail-in regime has not solved the systemic problem of bailout expectations in the market. One gaping legal loophole is the ‘precautionary recapitalization’ tool. Recent Italian bank failures are proof that big banks still have the muscle to negotiate with national governments and regulatory agencies to avoid a complete bail-in—that is, of course, if avoiding a complete bail-in is of individual, political and/or national interest. As long as exceptions to the European bail-in regime are made, banks and investors know that government guarantees are just as implicit as in 2007/08.

It is high time that Europe break the nexus between banks and national sovereigns. If the loopholes of the European bail-in regime are not closed soon, the Banking Union is doomed to fail. As sovereigns issue record levels of government debt to fund the response to the COVID-19 pandemic and the ECB is providing new long-term refinancing operations at attractive negative rates that allow banks in the Eurozone to earn big money on their sovereign risk exposure, the European banking system risks slipping back into the ‘doom-loop’ and threatening the future of the common currency. Never again!