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The economic costs of the Russia-Ukraine conflict in terms of lost entrepreneurship

3 minute read

Published at: R&D Today

The common belief that wars can be good for the economy is a myth; empirical evidence shows consistently that war negatively affects GDP per capita, argue Hanna Motuzenko and Paul Momtaz, co-authors of a new paper analysing the economic impact of the conflict in Ukraine. There are many ways that war reduces GDP per capita, including trade disruptions, human capital losses, physical capital destruction, technological regress, political instability, and more general uncertainty – it also impacts entrepreneurial activity. In this post Hanna and Paul provide insights into the findings of the paper. Read more

Less academic freedom leads to less innovation

7 minute read

Published at: London School of Economics: Impact Blog

Drawing on data showing a decline in academic freedom over the past decade, David Audretsch, Christian Fisch, Chiara Franzoni, Paul P. Momtaz and Silvio Vismara, analyse the relation of academic freedom to technological innovation, as represented by patents, finding a quantifiable causal link between reduced academic freedom to lower levels of innovation. Read more

Academic Freedom May Lead to Economic Growth through Innovation

2 minute read

Published at: Academe Blog

Academic freedom matters for many reasons. Our new study that is available for free download at SSRN empirically shows that academic freedom can be related to economic growth through more innovation. Examining 157 countries over the 1900–2015 period, the study concludes that academic freedom is associated with more patents filed (a quantity measure for innovation) and more forward citations per granted patent (a quality measure for innovation). Given that academic freedom has declined in the last decade for the first time since 1900, and the decline is particularly pronounced in innovation-intensive countries, the findings suggest that the decline in academic freedom slows down economic growth. Read more

Decentralized Finance, Crypto Funds, and Value Creation in Tokenized Firms

4 minute read

Published at: Columbia Law School Blue Sky Blog

Decentralized Finance (DeFi) employs blockchain technology and smart contracts with the goal of enabling perfectly disintermediated financial markets. Despite the far-reaching ambition, DeFi markets are experiencing increasing intermediation recently, as a new type of intermediary, so-called Crypto Funds (henceforth, CFs), reintroduces centralized market structures. In fact, the number of newly established active CFs has substantially grown over the last four years to more than 850 at the end of 2021, with a surge in total assets under management from $8.3 billion in mid-2018 to $57.5 billion in 2021. In a new article, we address the question of why CFs find it profitable to intermediate DeFi markets and whether CFs contribute to the overall efficiency of those markets. Read more

Decentralized Finance and Crypto Funds

5 minute read

Published at: Duke Law School FinReg Blog

Decentralized fundraising through Initial Coin Offerings (ICOs) for early-stage ventures is one important new business model that has only become viable through blockchain technology and smart contracts. Utility tokens, voucher-like assets providing access to a service or product that a venture promises to provide in the future, are generally considered as perfectly disintermediated peer-to-peer transactions, thus representing a prime example for decentralized finance (DeFi). Traditional venture fundraising involves substantial frictions, because many investors only trust and invest in projects with strong network ties. ICOs, as a form of token-based crowdfunding, allow startup ventures to raise funds in a trustless way from previously unknown investors across the globe. Read more

Financing Sustainable Entrepreneurship

4 minute read

Published at: Columbia Law School

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. Read more

The Economics of Crypto Funds

4 minute read

Published at: Columbia Law School

Crypto funds are a new financial intermediary that trade in cryptographically protected digital assets, known as coins or tokens. Both the number of crypto funds and investments in crypto funds are soaring. As of the second quarter of 2021, more than 800 crypto funds are active, and their aggregate assets under management exceed USD 60 billion. The trend is likely to continue, as crypto funds returned an average of 98 percent (before fees) to their investors in the first quarter of 2021. 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. Read more

Does it pay to invest in sustainable startups?

3 minute read

Published at: Duke Law School

Sustainable investing (or impact investing) is arguably the hottest topic in global finance. 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. Read more

“Never again” (or not?) — The European bail-in regime has yet to solve the systemic problem of implicit government guarantees

2 minute read

Published at: Oxford Business Law Blog

“Never again” was the impassioned conviction of governments worldwide after being forced to bail out banking institutions and provide guarantees and capital to avert systemic collapse as a result of the global financial crisis of 2007/08. Since then, the responsible international regulatory bodies have developed a slew of new regulations, including enhanced supervision, capital surcharges, and resolution regimes specifically for banks that would jeopardize the financial system if they were to fail. But is this bail-in regime credible? Read more

A Law and Economics Analysis of the European Takeover Directive: What about Enforcement?

5 minute read

Published at: Oxford Business Law Blog

A vast literature studies the role of institutions, such as regulation, for economic outcomes. An implicit assumption in many theoretical and empirical studies in the field is that the law is perfectly enforceable. However, in practice, most of the time this is not the case. The law may not be perfectly enforceable for several reasons. One reason is that enforcers may be capacity-constrained and therefore cannot prosecute each case. Another reason is that the costs of enforcement are too high to motivate economic agents to insist on their rights. There is another ‘European-specific’ reason for imperfect enforcement: European member states, which are obliged to transpose EU-level directives into national laws, often have considerable discretion over the design and scope of their enforcing bodies within their jurisdictions, which they may use to conserve or increase their competitive advantage. Read more

How Merger Control Impedes an Efficient Market for Corporate Control

3 minute read

Published at: Oxford Business Law Blog

Recent deliberations among antitrust enforcers about the pros and cons of breaking up BigTech have put the effectiveness of competition policy center stage. In our recent article in the Journal of Corporate Finance, we shed novel light on some unintended consequences of competition policy. Specifically, the article shows that, while attempting to prevent anti-competitive business combinations, an unintended and harmful byproduct of European merger control is that it impedes an efficient market for corporate control. Read more

Do Institutional Investors Prevent The Market For Tokenized Assets From Failing?

3 minute read

Published at: Duke Law School FinReg Blog

Given the absence of an institutional framework for the ICO market that could effectively mitigate the moral hazard in signaling, we ask, in a recent Journal of Corporate Finance publication, whether the ICO market is able to efficiently cope with this problem on its own. Specifically, we study whether institutional investors, such as Venture Capital (VC) funds, can extract economic rents associated with market-wide services such as rigorous due diligence and certification of high-quality start-ups. Read more

How do CEO emotions impact firm value?

3 minute read

Published at: Strategic Management Society (SMS) Blog

Why are CEOs coached for many hours in preparation for important public announcements, such as their presentations at annual meetings? The extensive preparation is because CEOs know that shareholders, the media, and other stakeholders will pay close attention not only to what they present but to how they present. How CEOs are perceived when they confer information may provide important clues as to how CEOs interpret the information themselves. Read more

code

Artificial Emotional Intelligence

Published:

This is an R script that I used in my paper CEO Emotions and Firm Valuation in Initial Coin Offerings: An Artificial Emotional Intelligence Approach which computes the seven basic Ekman (1999) emotions from facial muscle contraction-relaxation patterns based on Microsoft’s Face API. Read more

ESG Ratings for Startups

Published:

The code implements a machine-learning approach to construct ESG ratings for startups from text data (e.g., whitepapers, pitch decks, blog posts, Tweets). Our approach is also available via a web app → no ML/Python skills required (simply copy&paste text). Read more

data-page

Token Offerings Research Database

Published:

The Token Offerings Research Database (TORD) consists of hand-collected ICOs, IEOs, and STOs. As of June 2021, the TORD is more comprehensive than any other publicly available token offerings database. Read more

Universal Instrumental Variables (UnIVs) to Identify Peer Effects in Product Markets

Published:

Universal Instrumental Variables (UnIVs) help to address the endogeneity problem associated with the reflection problem in peer groups (i.e., disentangling the causal effect from a firm-specific treatment from a potentially latent variable that affects the entire peer group). The data help to causally identify peer effects in any product market classified by SIC codes. The instrumental variables have desirable properties, such as a (by econometrical construction) guaranteed exclusion restriction. Read more

media

A Law and Economics Analysis of the European Takeover Directive: What about Enforcement?

Published at: Oxford Business Law Blog

A vast literature studies the role of institutions, such as regulation, for economic outcomes. An implicit assumption in many theoretical and empirical studies in the field is that the law is perfectly enforceable. However, in practice, most of the time this is not the case. The law may not be perfectly enforceable for several reasons. One reason is that enforcers may be capacity-constrained and therefore cannot prosecute each case. Another reason is that the costs of enforcement are too high to motivate economic agents to insist on their rights. There is another ‘European-specific’ reason for imperfect enforcement: European member states, which are obliged to transpose EU-level directives into national laws, often have considerable discretion over the design and scope of their enforcing bodies within their jurisdictions, which they may use to conserve or increase their competitive advantage. Read more

“Never again” (or not?) — The European bail-in regime has yet to solve the systemic problem of implicit government guarantees

Published at: Oxford Business Law Blog

“Never again” was the impassioned conviction of governments worldwide after being forced to bail out banking institutions and provide guarantees and capital to avert systemic collapse as a result of the global financial crisis of 2007/08. Since then, the responsible international regulatory bodies have developed a slew of new regulations, including enhanced supervision, capital surcharges, and resolution regimes specifically for banks that would jeopardize the financial system if they were to fail. But is this bail-in regime credible? Read more

news

other-publications

Corporate governance convergence in the European M&A market

Finance Research Letters (with W. Drobetz)

Abstract: Cross-border acquisitions lead to improvements in shareholder rights and more dispersed ownership structures in a large sample of intra-European takeovers. These findings are evidence of corporate governance convergence toward the Anglo-Saxon system through cross-border takeovers. However, we find no support for the corporate governance motive hypothesis in cross-border acquisitions even after accounting for potential sample selectivity. Although acquirers have significantly better shareholder rights than their targets, there are no robust marginal bidder wealth effects for firms that acquire either weaker or stronger governance foreign targets. Instead, bidder wealth effects in cross-border acquisitions are better explained by acculturation costs. [working paper version here]

Investor Sentiment and Initial Coin Offerings

The Journal of Alternative Investments Spring 2019 (with H. Schröder and W. Drobetz)

Abstract: The authors examine to what extent the market for initial coin offerings (ICOs) is driven by investor sentiment. Their results, based on a comprehensive set of sentiment and coin price data, suggest that the ICO market is driven by crypto-related sentiment, but is almost unrelated to general capital market sentiment. Among the crypto-related sentiment, social media channels, rather than traditional news channels, are the main source of investor sentiment. The authors find that ICO firms exploit “windows of opportunity” and avoid periods of negative sentiment. Coins listed during periods with negative investor sentiment generate negative returns in the short run. Moreover, returns to investors on the first day of trading predict long-run returns up to six months. [working paper version here]

Token Sales and Initial Coin Offerings: Introduction

The Journal of Alternative Investments Spring 2019

Abstract: Token sales or initial coin offerings (ICOs) are smart contracts on a blockchain designed to raise external finance by issuing tokens or coins. This introduction provides an overview of this novel financing method. Differences between tokens and coins, types of tokens, and various ICO mechanisms are discussed. The author also describes the evolution of the ICO market and surveys some advantages of ICOs. [working paper version here]

Initial Coin Offerings, Asymmetric Information, and Loyal CEOs

Small Business Economics, Forthcoming

Abstract: A defining feature of initial coin offerings (ICOs) is that entrepreneurs bear the full marginal investment cost but profit only partially from the marginal investment payoff. This design may exacerbate agency conflicts inherent in corporate finance. As a consequence, signals of entrepreneurial quality such as CEO loyalty, which is an established concept in social psychology and can easily be linked to potential agency conflicts in corporate settings, might be a first-order determinant of economic outcomes in the ICO market. Consistent with this, I find that loyal CEOs have to offer less financial incentives to attract investors and are still able to raise more proceeds, conduct ICOs more thoroughly, and are less likely to fail. The findings are consistent with the hypothesis that asymmetric information between entrepreneurs and investors entail agency costs that are decreasing in CEO loyalty. [working paper version here]

The Pricing and Performance of Cryptocurrency

The European Journal of Finance

Abstract: This paper examines the performance of cryptocurrencies issued in initial coin offerings (ICOs) over a three-year period after the initial exchange listing. Average (median) ICO underpricing amounts to 15% (3%), even though 4 out of 10 ICOs destroy value on the first trading day. Liquidity, market capitalization, and high-low price ratios predict returns. Long-run buy-and-hold returns are positive for the mean and negative for the median. For holding periods between one and twenty-four months, the median ICO depreciates by 30%. Evidently, there is substantial positive skewness in the cryptocurrency market. Further, a size effect emerges from the data as an empirical regularity: Large ICOs are more often overpriced and underperform in the long run. [working paper version here]

Econometric Models of Duration Data in Entrepreneurship with an Application to Start-Ups Time-To-Funding by Venture Capitalists (VCs)

Journal of Applied Statistics

Abstract: Because time is a key determinant of entrepreneurial decision making, time-to-event models are ubiquitous in entrepreneurship. Widespread econometric misconception, however, may cause complicated biases in existing studies. The reason is spurious duration dependency, a complicated form of endogeneity caused by unobserved heterogeneity. This article discusses the endogeneity problem and methods to debias time-to-event models in entrepreneurship. Simulations and empirical evidence indicate that only the frailty approach yields consistently unbiased parameter estimates. An application to start-up firms’ time-to-funding shows that other methods lead to dramatic biases. Therefore, this article advocates a paradigm shift in the modeling of time variables in entrepreneurship. [working paper version here]

Valuing start-up firms: A reverse-engineering approach for fair-value multiples from venture capital transactions

Finance Research Letters (with J. A. Barg and W. Drobetz)

Abstract: The valuation of start-up firms is challenging, yet highly relevant for entrepreneurs and financiers alike. We reverse-engineer fair-value multiples by comparing the firm value at the time of financing with the firm value at the time of exit. Our framework produces reliable valuation multiples from observed venture capital transactions per industry and financing round. Despite their simplicity, sanity checks confirm that our multiples are highly performant in describing common valuation characteristics. Valuation multiples are higher when more experienced investors are involved, and when the exit occurs through an IPO rather than an M&A. In contrast, later stage financing rounds and larger investment consortia are associated with lower valuation multiples. [working paper version here]

portfolio

publications

Initial Coin Offerings

PLOS ONE, 2020

→ Coverage: European Parliament

Abstract: This paper examines the market for initial coin offerings (ICOs). ICOs are smart contracts based on blockchain technology that are designed for entrepreneurs to raise external finance by issuing tokens without an intermediary. Unlike existing mechanisms for early-stage finance, tokens potentially provide investors with rapid exit opportunities thanks to liquid trading platforms. The marketability of tokens offers novel insights into entrepreneurial finance, which I explore in this paper. First, I document that investors earn on average 8.2% on the first day of trading. However, about 40% of all ICOs destroy investor value on the first day of trading. Second, I explore the determinants of market outcomes and find that management quality and the ICO profile are positively correlated with the funding amount and returns, whereas highly visionary projects have a negative effect. Among the 21% of all tokens that get delisted from a major exchange platform, highly visionary projects are more likely to fail, which investors anticipate. Third, I explore the sensitivity of the ICO market to adverse industry events such as China’s ban of ICOs, the hack of leading ledgers, and the marketing ban on FaceBook. I find that the ICO market is highly susceptible to such environmental shocks, resulting in substantial welfare losses for investors. [working paper version here]

Competition Policy and the Profitability of Corporate Acquisitions

Journal of Corporate Finance, 2020 (with G. Dissanaike and W. Drobetz)

Nominated for best paper award (Financial Management Association)

Abstract: Merger control exists to help safeguard effective competition. However, findings from a natural experiment suggest that regulatory merger control reduces the profitability of corporate acquisitions. Uncertainty about merger control decisions reduces takeover threats from foreign and very large acquirers, therefore facilitating agency-motivated deals. Valuation effects are more pronounced in countries with stronger law enforcement and in more concentrated industries. Our results suggest that competition policy may impede the efficiency of the M&A market. [working paper version here]

Antitakeover Provisions and Firm Value: New Evidence from the M&A Market

Journal of Corporate Finance, 2020 (with W. Drobetz)

Abstract: New evidence from acquisition decisions suggests that antitakeover provisions (ATPs) may increase firm value when internal corporate governance is sufficiently strong. We document that, in Germany, firms with stronger ATPs, and particularly supermajority provisions, are better acquirers. Managers of high-ATP firms create value in acquisitions by making governance-improving deals. They are more likely to engage in acquisitions that reduce their own entrenchment level and less likely to invest in declining industries. Further, our empirical evidence is consistent with a short-termist interpretation. We show that takeover threats can induce myopic investment decisions, which ATPs can mitigate. They also lead managers to engage more often in value-creating long-term and innovative investing, and increase their sensitivity to investment opportunities. Our findings contribute to a growing literature challenging conventional wisdom that the agency-increasing effect of ATPs empirically dominates the myopia-eliminating effect, suggesting that a more contextual view of the value implications of ATPs is necessary. [working paper version here]

Institutional Investors and Post-ICO Performance: An Empirical Analysis of Investor Returns in Initial Coin Offerings (ICOs)

Journal of Corporate Finance, 2020 (with C. Fisch)

Abstract: We examine the role of institutional investors in Initial Coin Offerings (ICOs). Taking a financial investor’s perspective, we assess the determinants of post-ICO performance via buy-and-hold abnormal returns in a sample of 565 ICO ventures. Conceptually, we argue that institutional investors’ superior screening (selection effect) and coaching abilities (treatment effect) enable them to partly overcome the information asymmetry of the ICO context and extract informational rents from their ICO investments. We find that institutional investor backing is indeed associated with higher post-ICO performance. Disentangling the selection and treatment effects econometrically, we find that both of these effects explain the positive impact on post-ICO per-formance. Overall, our results highlight the importance of institutional investors in the ICO context. [working paper version here]

Entrepreneurial Finance and Moral Hazard: Evidence from Token Offerings

Journal of Business Venturing, 2021

→ Coverage: The Economist

Abstract: This paper provides the first evidence of a moral hazard in signaling in an entrepreneurial finance context, by examining token offerings or Initial Coin Offerings (ICOs). Entrepreneurs ability to signal quality is crucial to succeeding in the competition for growth capital. However, the absence of institutions that verify endogenous signals may induce a moral hazard in signaling. Consistent with this hypothesis, artificial linguistic intelligence indicates that token issuers systematically exaggerate information disclosed in whitepapers. Exaggerating entrepreneurs raise more funds in less time, suggesting that investors do not see through this practice initially. Eventually, the crowd learns about the exaggeration bias through trading with other investors. The resulting investor disappointment causes the cryptocurrency to depreciate and the probability of platform failure to increase. [working paper version here]

CEO Emotions and Firm Valuation in Initial Coin Offerings: An Artificial Emotional Intelligence Approach

Strategic Management Journal, 2021

Abstract: CEO emotions are difficult to measure and hence empirically understudied. However, using artificial emotional intelligence, positive and negative affects can be identified from facial muscle contraction-relaxation patterns obtained from public CEO photos during initial coin offerings (ICOs), i.e., blockchain-based issuances of cryptocurrency tokens to raise growth capital. The results suggest that CEO affects impact firm valuation in two ways. First, CEOs’ own firm valuations conform more to those of industry peers if negative affects are pronounced (conformity mechanism). Second, investors use CEO affects as signals about firm value and discount when negative affects are salient (signaling mechanism). Negative affects can reduce firm value by up to 15%. Both mechanisms are stronger in the presence of asymmetric information. [working paper version here]

The Economics of Law Enforcement: Quasi-Experimental Evidence from Corporate Takeover Law

Journal of Corporate Finance, 2021 (with G. Dissanaike, W. Drobetz, J. Rocholl)

Lead Article
Nominated for best paper award (Financial Management Association)

Abstract: This paper examines the impact of takeover law enforcement on corporate acquisitions. We use the European Takeover Directive as a natural experiment, which harmonizes takeover law across countries, while leaving its enforcement to the discretion of individual countries. We exploit this heterogeneity in enforcement quality across countries in a difference-in-differences-in-differences model, while employing an overall inductive research approach, following the recommendation in Karpoff and Whittry (2018). We find that acquirer returns increase in countries with changes in takeover law, driven by improved target selection and lower cost of financing. The increase in acquirer returns is lower in weak enforcement jurisdictions, which we identify by developing a novel Takeover Law Enforcement Index (TLEI). The findings show that takeover law can mitigate agency conflicts, but its true value depends on its enforcement. Our results are robust to a number of robustness tests. [working paper version here]

The CEO Beauty Premium

Strategic Entrepreneurship Journal, 2022 (with M. G. Colombo, C. Fisch, S. Vismara)

SEJ/Wiley 2022 top cited paper award

Abstract: How do top executives’ physical attributes impact firm value? Our study combines Upper Echelons Theory (UET) with insights from social psychology and labor economics to investigate how Chief Executive Officers’ (CEOs’) facial attractiveness influences firm valuation by investors in Initial Coin Offerings (ICOs). We document a pronounced CEO beauty premium. The positive relationship between CEO attractiveness and firm valuation is not driven by stereotype-based evaluations; that is, investors do not mistake attractiveness for other latent traits, such as competence, intelligence, likeability, or trustworthiness. Rather, CEO attractiveness seems to bear economic value per se. It helps attract institutional investors and has a sustainable effect on token price performance. Our results are immune to recall and confirmation biases, reverse causality, and unobserved heterogeneity. [working paper version here]

Financing Sustainable Entrepreneurship: ESG Measurement, Valuation, and Performance

Journal of Business Venturing, 2022 (with S. Mansouri)

WAIFC 2022 Best Paper Award
EBS Best Paper Award 2023
Academy of Management 2023 Best Paper Award on Sustainable Entrepreneurship sponsord by the Ewing Marion Kauffman Foundation

Abstract: Sustainability orientation has a positive effect on startups’ initial valuation and a negative effect on their post-funding financial performance. All else equal, improving sustainability orientation by one standard deviation increases startups’ funding amount by 28% and decreases investors’ abnormal returns per post-funding year by 16%. The results hold in a large sample of blockchain-based crowdfunding campaigns, also known as Initial Coin Offerings (ICOs) or token offerings. A key contribution is our a machine-learning approach to assess startups’ Environment, Society and Governance (ESG) properties from textual data, which we make readily available at www.SustainableEntrepreneurship.org. [working paper version here]

Performance Measurement of Crypto Funds

Economics Letters, 2023 (with N. Dombrowski, W. Drobetz)

Abstract: Crypto funds (CFs) are a growing intermediary in cryptocurrency markets. We evaluate CF performance using metrics based on alphas, value at risk, lower partial moments, and maximum drawdown. The performance of actively managed CFs is heterogenous: While the average fund in our sample does not outperform the overall cryptocurrency market, there seem to be some few funds with superior skills. Given the non-normal nature of fund returns, the choice of the performance measure affects the rank orders of funds. Compared to the Sharpe ratio, the most commonly applied metric in practice, performance measures based on alphas and maximum drawdown lead to diverging fund rankings. Depending on their ranking of preferences, CF investors should thus consider a bundle of metrics for fund selection and performance measurement. [working paper version here]

Decentralized Finance (DeFi) Markets for Startups: Search Frictions, Intermediation, and the Efficiency of the ICO Market

Small Business Economics, 2024

Abstract: This paper examines the efficiency of the Initial Coin Offering (ICO) market through a search-theoretical lens. Search intensity associated with the process of identifying valuable startups is increasing in market granularity. Blockchain technology increases market granularity because asset tokenization lowers entry barriers. Lower-end entrants, however, increase aggregate search intensity but may lack search skills. The resulting search-related inefficiency creates a niche for intermediaries or institutional investors that specialize on search. Consistent with the theory, specialized crypto funds increase ICO market efficiency by reducing search frictions, inter alia, by shortening the time-to-funding and increasing the funding amount. At the same time, crypto funds extract sizable economic rents for their intermediation services. Overall, the study relates to the general trade-off between centralization and decentralization in entrepreneurial finance. It suggests that market frictions specific to early-stage crowdfunding of entrepreneurship may prevent perfectly Decentralized Finance (DeFi) markets from functioning efficiently. [working paper version here]

talks

teaching

Econometrics

Published:

This is the econometrics module that I taught in the PhD program at Hamburg Business School, University of Hamburg, Germany in 2018. Read more

wp

The Discount for Lack of Marketability in Private Investments in Public Equity

Published:

Work in progress (with A. Bernardo, I. Welch)

Abstract: Our paper estimates that shares in Private Investments in Public Equity (PIPEs) offered a discount of 3-4% for each year during which these shares could not be resold. Our estimates make use of the duration of the resale restriction and information about the effects of a regulatory change. In 2008, the SEC amended Rule~144 to shorten the default statutory holding period. Our estimates are smaller than previous estimates and robust to various controls and endogeneity concerns. The discount can be twice as large in offerings in which marketability is a greater concern.



The Labor Economics of Inventing

Published:

(with D. Harhoff, D. Heller)

Abstract: The majority of inventions generated in modern economies are developed by employed individuals on the behalf of their employer. This paper provides first representative evidence on the marginal income per patent (MIP) to employed inventors. To this end, we explore administrative data for a representative sample of 148,743 unique inventors in Germany linked to their income and patenting activities. We find the average inventor earns a MIP of 7% per annum over the patent lifecycle. These results are particularly pronounced for high quality patents and in firms for which the marginal contribution of patents is high. Moreover, exploring the labor mobility effects of across-firm variation in the MIP, we find that firms that pay above-average premium recruit a higher number of high-quality inventors.

A Hurdle-Rate Theory of Inventive Procyclicality

Published:

Rej&R at Research Policy (with D. Audretsch, W. Drobetz, E.E. Ernst, S. Vismara)

→ Coverage: R&D Today

Abstract: Schumpeterian arguments of “creative destruction” predict that innovation is countercyclical. However, empirical findings demonstrate the contrary. We apply corporate finance principles to macro- and innovation economics and propose a “hurdle-rate theory of inventive procyclicality”. High-ERP periods stifle innovation because many R&D projects do not pass corporate budgeting decisions when discount rates are high. Consistent evidence suggests that the hurdle-rate effect is less pronounced in firms with financial slack, institutional ownership with long-term orientation, and weak product-market competition. In an attempt to reconcile the procyclical evidence with Schumpeter’s countercyclical theory, we show that firms engaging in exploratory search suffer less during high-ERP episodes than those focusing on exploitative search, and patents developed during high-ERP periods have a higher technological impact and receive significantly more forward citations. Finally, we exploit the staggered variation in state-level R&D tax credits in difference-in-differences analyses to establish a causal link between the ERP and patent value.

Emotions in New Venture Teams: Affects as Signals, Emotional Diversity, and Valuation Effects in Initial Coin Offerings (ICOs)

Published:

Rej&R at Strategic Entrepreneurship Journal

Abstract: New Venture Teams’ (NVTs’) collective emotions impact startup valuations through their intensity and diversity. I identify NVTs’ affective traits with artificial emotional intelligence by tracking 2,520 individuals across 165 NVTs during their Initial Coin Offerings (ICOs). The level of NVTs’ negative affects correlates with lower valuations, while within-NVT emotional diversity has a value-increasing effect. Intuitively, negative affects are associated with traits that may be prejudicial in dynamic entrepreneurial markets, but could be valuable if balanced by opposite traits in emotionally diverse NVTs. Moderated mediation analyses suggest that NVT affects have pronounced direct valuation effects. Overall, I extend the focus of the affective entrepreneurship literature from the entrepreneur to the team level, introduce the concept of emotional diversity, and explore the role of emotions in entrepreneurial finance.

Decentralized Finance, Crypto Funds, and Value Creation in Tokenized Firms

Published:

R&R at Journal of Business Venturing (with D. Cumming, N. Dombrowski, W. Drobetz)

→ Coverage: Duke Law School FinReg Blog, Columbia Law School BlueSky Blog

Abstract: Crypto Funds (CFs) represent a novel investor type in entrepreneurial finance. CFs intermediate Decentralized Finance (DeFi) markets by pooling contributions from crowd-investors and investing in tokenized startups, combining sophisticated venture- and hedge-style investment strategies. We compile a unique dataset combining token-based crowdfunding (or Initial Coin Offerings, ICOs) data with proprietary performance data of CFs. CF-backed startup ventures obtain higher ICO valuations, outperform their peers in the long run, and benefit from token price appreciation around CF investment disclosure in the secondary market. Moreover, CFs beat the market by roughly 2.5 percent per month. Their outperformance is persistent, suggesting that CFs deliver abnormal returns because of skill, rather than luck. These performance effects for CFs and CF-backed startups are driven by the investor network centrality. Overall, our study paves the way for research on what some refer to as the >>crypto fund revolution<< in entrepreneurial finance.

Cybercrime on the Ethereum Blockchain

Published:

R&R at Journal of Banking & Finance (with L. Hornuf, R. Nam, Y. Yuan)

→ Coverage: Decrypt, CoinTribune, Duke Law School
Best Paper Award: PDW for Financial Market Misconduct SI in the Journal of Banking and Finance

Abstract: We propose a taxonomy of cybercrime on the Ethereum blockchain and examine how cybercrime impacts victims’ risk-taking and returns. Our difference-in-differences analysis of a sample of victims and matched non-victims suggests that victims increase their long-term total risk-taking and earn lower risk-adjusted returns in the post-cybercrime period. Victims’ long-term total risk-taking increases because they increase diversifiable risk in the long term. The increased diversifiable risk correlates with victims’ withdrawal from altcoins after cybercrime. At the same time, the reduction in risk-adjusted returns correlates with increased trading activity and churn, due plausibly to managing cybercrime exposure. In the cross-section of Ethereum addresses, we show that the most-affluent victims take a systematic approach to restore their pre-cybercrime wealth level, while the least-affluent victims turn into gamblers. Finally, a parsimonious forensic model explains a good part of the addresses’ probability of being involved in cybercrime, both on the victim and the cybercriminal side.

The Financial and Non-Financial Performance of Token-Based Crowdfunding: Certification Arbitrage, Investor Choice, and the Optimal Timing of ICOs

Published:

R&R at Entrepreneurship Theory and Practice (with N. Dombrowski, W. Drobetz, L. Hornuf)

→ Coverage: Oxford Business Law Blog

Abstract: What role does the selection of an investor and the timing of financing play in initial coin offerings (ICOs)? We investigate the operating and financial performance of ventures conducting ICOs with different types of investors at different points in the venture life cycle. We find that, relative to purely crowdfunded ICO ventures, institutional investor-backed ICO ventures exhibit poorer operating performance and fail earlier. However, conditional on their survival, these ventures financially outperform those that do not receive institutional investor support. The diverging effects of investor backing on financial and operating performance are consistent with our theory of certification arbitrage; i.e., institutional investors use their reputation to drive up valuations and quickly exit the venture post-ICO. Our findings further indicate that there is an inverted U-shaped relationship for fundraising success of ICO ventures over their life cycle. Another inverted U-shaped relationship exists for the short-term financial performance of ICO ventures over their life cycle. Both the fundraising success and the financial performance of an ICO venture initially increase over the life cycle and eventually decrease after the product piloting stage.

Academic Freedom and Innovation

Published:

R&R at PLOS ONE (with D. Audretsch, C. Fisch, C. Franzoni, S. Vismara)

→ Coverage: LSE Impact Blog, Academe Blog, Research Europe, ProMarket, Univeristy of Chicago

Abstract: The first-ever article published in Research Policy was Casimir’s (1971) advocacy of academic freedom in the light of the industry’s increasing influence on research in universities. Half a centure later, the literature attests to the dearth of work on the role of academic freedom for innovation. To fill this gap, we employ instrumental variable techniques to identify the impact of academic freedom on the quantity (patent applications) and quality (patent citations) of innovation output at the country level. The empirical evidence suggests that improving academic freedom by one standard deviation increases patent applications and forward citations by at least 37% and 29%, respectively. The results hold in a representative sample of 157 countries over the 1900-2015 period, with a sample/population coverage ratio of 92%. This research note also is an alarming plea to policymakers: Global academic freedom has declined over the past decade for the first time over the last century. Our estimates suggest that the decline of academic freedom has resulted in a global loss quantifiable with at least 4.0% fewer patents filed and 5.9% fewer patent citations.

The Economic Costs of the Russia-Ukraine War: A Synthetic Control Study of (Lost) Entrepreneurship

Published:

R&R at Strategic Entrepreneurship Journal (with D. Audretsch, H. Motuzenko, S. Vismara)

→ Coverage: R&D Today, LSE Business Review, Vox Ukraine

Abstract: This synthetic control study quantifies the economic costs of the Russo-Ukrainian war in terms of foregone entrepreneurial activity in both countries since the invasion of Crimea in 2014. Relative to its synthetic counterfactual, Ukraine’s number of self-employed dropped by 675,000, corresponding to a relative loss of 20%. The number of Ukrainian SMEs temporarily dropped by 71,000 (14%) and recovered within five years of the conflict. In contrast, Russia had lost more than 1.4 million SMEs (42%) five years into the conflict. The disappearance of Russian SMEs is driven by both fewer new businesses created and more existing business closures.