Working Papers
How Sustainability Segments Entrepreneurial Finance Markets
Published:
R&R at Journal of Business Venturing (with F. Xia, J. Thewissen, and S. Yan)
Abstract: We show that sustainability segments entrepreneurial finance markets by investor types in token-based crowdfunding, a market that is populated by individual and institutional investors alike. While ventures backed by institutional investor do not (need to) emphasize environmental, social, and governance (ESG) ambitions, non-backed ventures raising funds from masses of individual contributors display salient ESG orientations, with a disproportiantely pronounced governance dimension. ESG helps ventures unsuccessful in securing institutional investments partially compensate for the funding disadvantage, as individuals exhibit higher willingness-toinvest in sustainable ventures. Using artificial intelligence to separate ESG orientations into two latent sources, substantive and symbolic, we find that symbolic ESG is more prevalent in non-backed ventures, potentially suggesting "greenwashing." The startup valuations of individual investors are affected by substantive and symbolic ESG orientations, although symbolic claims do not compensate for the lack of institutional certification. Overall, sustainability-driven market segmentation is in line with the conjecture that individual investors perceive sustainability as a legitimization substitute for ventures that lack certification from institutional investors.
ESG and Private Capital
Published:
R&R at Journal of International Business Studies (with W. Drobetz, S. El Ghoul, O. Guedhami, M. Kolbe)
Abstract: [Title and abstract modified for anonymity.] We provide a theoretical explanation and empirical evidence for the puzzling fact that, in contrast to the risk-return theory of finance, ESG risks lead to lower equity returns in private markets.
Financing Innovation: A Hurdle-Rate Theory of Inventive Procyclicality
Published:
R&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.
Generative Artificial Intelligence and Cryptocurrency Returns
Published:
Rej&R at Journal of Banking and Finance (with H. Urban)
Abstract: [Title and abstract modified for anonymity.] We propose a novel ML/AI approach to improve return prediction for cryptocurrencies. Our approach is much simpler than existing methods and yet achieves twice the alpha of comparable models. We also theoretically justify the statistical outperformance of our model.
Non-Practicing Entities as Financial Intermediaries in the Market for Technology: A Case Study of Silicon Valley’s Brokered Patent Market
Published:
R&R at Small Business Economics
Abstract: Non-Practicing Entities (NPEs) have been characterized as either (1) patent trolls who are self-serving agents that absorb the social value of inventions for private gain or (2) benign middlemen who may increase social welfare by facilitating commercialization for upstream inventions to resource-constrained inventors. This paper proposes a third view: NPEs as financial intermediaries that may improve the efficiency of technology markets by reducing patent market frictions. Using proprietary transaction-level data from Silicon Valley’s novel brokered patent market (BPM), we estimate a standard search-and-bargaining model to quantify NPEs’ contributions to patent market efficiency and the underlying mechanisms. The results suggest that Silicon Valley’s BPM is relatively inefficient for two reasons. First, there is misallocative inefficiency; that is, the market regularly fails to reallocate patents to the entity with the highest valuation. Reasons include search (buyer/seller matching), trading (time to transaction), and bargaining (rent sharing) frictions. Second, there is mispricing-related inefficiency; that is, transaction prices are below the fair value due to these frictions. Importantly, we find that NPEs play an ambiguous role for the efficiency of Silicon Valley’s BPM. On the one hand, NPEs reduce trading frictions; on the other, NPEs exacerbate search and bargaining frictions. In particular, transaction surplus sharing is highly asymmetric to the advantage of NPEs and disadvantage of inventors, which curtails the welfare contribution of Silicon Valley’s BPM to society. The study suggests that policymaking would benefit from a more nuanced view on NPE activity.
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.
Violent Conflict and (Necessity) Entrepreneurship: An Institutional and Socio-Cognitive Perspective
Published:
(with C. Fisch, M. Hirschman)
→ BCERC 2024 Best Paper Award on Entrepreneurial Purpose
Abstract: The role of violent conflict for entrepreneurial activity is relatively underexplored and controversial in the entrepreneurship literature. Drawing on institutional theory, a country’s level of conflict should reduce individuals’ propensities to engage in entrepreneurship and shift the relative share of activity from opportunity to necessity entrepreneurship. We confirm these predictions in a multilevel analysis of a longitudinal sample of 1.2 million individuals from 86 countries over the 2009–2017 period, whilst addressing endogeneity concerns associated with entrepreneurial selection. Our results draw a more nuanced picture of war’s entrepreneurial ramifications by unveiling heterogeneous treatment effects for opportunity and necessity entrepreneurship. Importantly, although violent conflict comes as an exogenous shock to individual entrepreneurs, individual entrepreneurs’ socio-cognitive traits determine their sensitivity to the institutional shock, with individuals’ perceived entrepreneurial network positions, entrepreneurial skills, and fear of failure emerging as strong moderatoring forces.
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.
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.