WEFI

Andy Li (University of Amsterdam)

Do Development Financial Institutions Create Impact through Venture Capital Investments?

coauthors Aleks Andonov and Paul Smeets

Discussed by: Martin Aragoneses (Insead)

Abstract

Development Finance Institutions (DFIs) manage assets totaling $23 trillion, yet little research has been conducted on their investment activities and impact. We document that DFIs have increasingly invested in venture capital (VC) over the past three decades, participating as limited partners in one out of every six deals. We collect the mandates of DFIs and identify four main objectives they pursue through VC investments: building a VC ecosystem, supporting entrepreneurship and small and medium-sized enterprises, fostering innovation, and promoting sustainable business practices. We empirically test whether DFIs meet these objectives by addressing market failures, including externalities, information frictions, and coordination challenges. Our findings vary between developed and developing economies. In developing economies, DFIs are more likely to target industries with positive externalities, provide capital to underrepresented fund managers, and improve return transparency. However, they are less likely than conventional VC investors to support young funds or early-stage deals, and their investments have no significant impact on firm growth or innovation. In developed economies, we find little evidence that DFIs address market failures and their impact is even more limited. Overall, our findings suggest that DFIs have significant room to enhance their impact by better addressing market failures, aligning investments with stated mandates, and embracing higher risk in their portfolios.

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Jennifer Kao (UCLA)

“Representation in Product Development: Evidence from Insurance and Clinical Trials” (paper)

coauthor Tamar Oostrom, OSU

Discussed by: Tong Liu (MIT)

Abstract

We investigate the causes and consequences of demographic disparities in product development. In 2000, Medicare extended coverage for clinical trial costs, lowering the cost of participation for elderly enrollees. This policy shifted the rate and direction of clinical research, leading to a 24 percent increase in trials targeting diseases common among the elderly, compared to those affecting younger populations. Trial sponsors expanded the enrollment criteria of trials to include more elderly participants. This policy was also associated with an increase in drug utilization for elderly drugs and a reduction in adverse events.

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Katja Kisseleva-Scherenberger (Frankfurt School of Finance & Management)

“With a Little Help from My Family: Informal Startup Financing” (paper)

coauthors Brian K. Baik (Harvard Business School) and Johan Karlsen (Norwegian School of Economics)

Discussed by: Tom Meling (OSU)

Abstract

Using a unique dataset that contains financial information of Norwegian startups and their investors, we depict the characteristics of informal financing, which are startup investments made by family of the entrepreneur. Consistent with theoretical predictions, we document that informal investments are associated with lower returns than external investments, and lower startup risk-taking behavior. On the other hand, firms that receive investments from both informal and external investors exhibit stronger forms of risk taking. Our instrumental variables (IV) regressions further support our findings. Reduced risk-taking behavior is mainly driven from wealthy informal investors, which is consistent with the argument that wealthy investors may be more risk averse. Collectively, our findings empirically illuminate an important source of startup financing that affects startup behavior.

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Apoorv Gupta (Dartmouth)

“Demographics and Technology Diffusion: Evidence from Mobile Payments” (paper)

coauthors Nicolas Crouzet (Northwestern), Pulak Ghosh (India Inst. of Mgmt) and Filippo Mezzanotti (Northwestern)

Discussed by: Boris Vallee (HBS)

Abstract

Using data on the adoption of mobile payment systems in India, we argue that the age composition of the population can impact the diffusion of new technologies. Evidence from a leading Indian bank shows that younger adults tend to prefer mobile payments over traditional cards. In a model of technology adoption, these age-driven differences in attitudes toward technology create stronger adoption incentives for businesses facing younger consumers. We validate this prediction using store-level data on mobile payment adoption by merchants. Our findings suggest that demographics can pose an obstacle to the diffusion of financial innovation.

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Daniel Karpati (ESE Rotterdam)

“Self-Employed Mothers: Child Penalties, Maternity Benefits, and Family Health” (paper)

coauthors  Fabrizio Core, ESE Rotterdam.

Discussed by: Elena Simintzi (UNC)
Abstract

We study the effects of motherhood on self-employed women’s business activity, and the moderating role of maternity benefits. Using rich administrative data from the Netherlands, we first document that childbirth reduces the business revenue of self-employed women by about 50% in the quarter of birth and 25% subsequently. We then study the introduction of a flat-rate maternity cash benefit for the self-employed. Exploiting variation in benefit eligibility by birth month, we estimate that mothers eligible for the benefit further reduce their business revenue and income in the first two years after childbirth. The decrease in business income amounts to approximately half of the benefit amount, leading to an overall increase in household income. Eligible mothers likely spend more time with their child, as the use of formal daycare is significantly reduced. Lastly, we assess the effects of benefit eligibility on the well-being of mothers and their children. While we find no impact on household composition or maternal health, the benefit does reduce health expenditures and medicine use among children in their first year after birth, although not in the long run.

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Yiming Qian (UConn)

Paper Title: “From Competitors to Partners: Banks’ Venture Investments in Fintech”

We hypothesize and find evidence that banks use financial investments in fintech startups
as a strategic approach to navigate fintech competition. We first document that banks’
venture investments have increasingly focused on fintech firms. We find that banks fac-
ing greater fintech competition are more likely to make venture investments in fintech
startups. Banks target fintech firms that exhibit higher levels of asset complementarities
with their own business. Finally, our instrumental variable analyses show that financial
investments result in increased probabilities of operational collaborations and knowledge
transfer between the investing bank and the fintech investee.

Presenter: Yiming Qian (UConn)

Coauthors: Manju Puri (Duke) and Xiang Zheng (Uconn)

Discussant: Paul H. Beaumont (McGill)

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Ye Zhang (SSE)

Paper Title: Does ESG Investing Help VC Funds to Attract Startups? Experimental Evidence

This paper studies how venture capitalists’ (VCs) ESG investments affect startups’ fundraising decisions, using complementary experiments with actual US startup founders. Results reveal the divergent effects of E and S. Founders are reluctant to collaborate with environmental VCs due to concerns about profitability and the likelihood of securing investment. However, founders, particularly those with ESG focus, favor social VCs partially due to their social preferences. A novel payment game experiment further confirms the existence of founders’ ESG preference in their fundraising endeavors. Lastly, there exist substantial heterogeneous effects based on founders’ political affiliations, industry backgrounds, investor gender, and market conditions.

Presenter: Ye Zhang (SSE)

Coauthors

Discussant: Emanuele Colonelli (Booth)

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