WEFI

Jay Ritter (University of Florida)

Title: “SPACs”

Going public by merging with a Special Purpose Acquisition Company (SPAC) is much more expensive than conducting a traditional IPO. We rationalize why some companies merge with a SPAC by listing the potential benefits. We analyze the agency problems that certain SPAC features address. SPAC IPO investors and deal sponsors have earned remarkably high annualized average returns, although we warn that recent deals are likely to disappoint. Public investors in the merged companies have earned very low market-adjusted returns on an equally weighted basis, although high redemptions on the worst deals have limited the amount of money that they lost.

Presenter: Jay Ritter (University of Florida)

Coauthors: Minmo Gahng (University of Florida) and Donghang Zhang (University of South Carolina)

Discussant: Stefan Lewellen (Pennsylvania State University)

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Yulia Zhestkova (University of Chicago)

Title: “Fencing Off Silicon Valley”

The treatment of foreign investors is a contentious topic in U.S. entrepreneurship policy. We model a setting where foreign corporate investments in Silicon Valley may allow U.S. entrepreneurs to pursue technologies that they could not otherwise, but may also lead to knowledge spillovers. We show that despite the benefits from such inbound investments for U.S. firms, it may be optimal for the U.S. government to raise their costs to deter investments. Using as comprehensive as possible a sample of investments by foreign corporate investors in U.S. startups, we find evidence consistent with the presence of knowledge spillovers to foreign investors.

Presenter: Yulia Zhestkova (University of Chicago)

Coauthors: Ufuk Akcigit (University of Chicago), Sina Ates (Board of Governors of the Federal Reserve System), Josh Lerner (Harvard Business School) and Richard Townsend (University of California Sa Diego)

Discussant: Juanita Gonzalez-Uribe (The London School of Economics and Political Science)

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Jessica Jeffers (University of Chicago)

Title: “Risk and Return of Impact Investing Funds”

We provide the first analysis of the risk exposure and risk-adjusted performance of impact investing funds, private market funds with dual financial and social goals. We introduce a dataset of impact fund cash flows and exploit distortions in VC performance measures to characterize risk profiles. Impact funds have a lower market β than comparable private market strategies. Accounting for β, impact funds underperform the public market, though not more so than comparable strategies. We consider alternative pricing models, accounting for sustainability and emerging markets risk. We show investors’ wealth portfolios and taste change the perceived financial merit of impact investing.

Presenter: Jessica Jeffers (University of Chicago)

Coauthors: Tianshu Lyu (Yale School of Management) and Kelly Posenau (Cornell University)

Discussant: Morten Sorensen (Dartmouth College)

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Will Gornall (University of British Columbia)

Title: “A Valuation Model of Venture Capital-Backed Companies with Multiple Financing Rounds”

This paper develops the first option pricing model of venture capital-backed companies and their security values that incorporates the dilutive future financing rounds prevalent in the industry. Applying our model to 19,000 companies raising 37,000 rounds shows that preferred contractual features make the most recently issued preferred shares worth on average 56% more than common shares. While future rounds have a negligible impact on most securities, they significantly impair the value of securities with high liquidation multiples or seniority. Counterintuitively, future “investor-friendly” rounds transfer value from current investors to founders and other common shareholders, significantly reducing the value of many preferred protections. Our model-implied valuations predict exit values, price changes, and outcomes. Modeled security values are consistent with prices reported by specialized intermediaries but suggest dramatic underreporting of common share values for tax purposes.

Presenter: Will Gornall (University of British Columbia)

Coauthors: Ilya A. Strebulaev (Stanford University)

Discussant: Oleg Gredil (Tulane University)

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Laura Lindsey (Arizona State University)

Title: “Mistake-based Discrimination in Early-stage Finance”

Motivated by new stylized facts from Form D financings, we develop a simple framework in which security choice in early firm financing depends on the entrepreneurial talent contri- bution to firm value relative to capital, which investors may perceive with bias. Observed outcomes are not subject to such bias. Consistent with our model, female-led firms are more likely to use debt funding in early stages and exit at least as successfully as firms without a female founder, with a greater proportion of IPO exits. Female-led firms also have larger boards of directors at the initial stages, indicative of greater monitoring. The early differences in financing and monitoring subside in later rounds, suggesting that bias declines as information is produced. We argue that investors tend to under (over) estimate the human (physical) capital contribution to total firm value in female-led startups, offering new insight into the gender financing gap.

Presenter: Laura Lindsey (Arizona State University)

Coauthors: Luana Zaccaria (Einaudi Institute for Economics and Finance)

Discussant: Emmanuel Yimfor (University of University of Michigan)

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Avri Ravid (Yeshiva University)

Title: “Innovation under Ambiguity and Risk”

We model innovation investments as real options and explore the implications of ambiguity—Knightian uncertainty—and risk for innovation decisions. Our model provides predictions for creating options to invest and options to wait. The ensuing empirical analysis uses a risk measure and a new outcome-independent measure of ambiguity. We find a consistently significant negative effect of ambiguity on R\&D, patents, and citations, supporting our theoretical predictions. We also find a significant positive effect of risk on R\&D, but the effect of risk on patents and citations is negative and significant. Ambiguity matters more for high-tech firms, consistent with intuition.

Presenter: Avri Ravid (Yeshiva University)

Coauthors: Gabriela Coiculescu (Yeshiva University) and Yehuda (Yud) Izhakian (City University of New York)

Discussant: Stephen J. Terry (Boston University)

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Sara Moreira (Northwestern University)

Title: “Patents to Products: Product Innovation and Firm Dynamics”

We study the relationship between patents and actual product innovation in the market, and how this relationship varies with firms’ market share. We use textual analysis to create a new data set that links patents to products of firms in the consumer goods sector. We find that patent filings are positively associated with subsequent product innovation by firms, but at least half of product innovation and growth comes from firms that never patent. We also find that market leaders use patents differently from followers. Market leaders have lower product innovation rates, though they rely on patents more. Patents of market leaders relate to higher future sales above and beyond their effect on product innovation, and these patents are associated with declining product introduction on the part of competitors, which is consistent with the notion that market leaders use their patents to limit competition. We then use a model to analyze the firms’ patenting and product innovation decisions. We show that the private value of a patent is particularly high for large firms as patents protect large market shares of existing products.

Presenter: Sara Moreira (Northwestern University)

Coauthors: David Argente (Pennsylvania State University), Salome Baslandze (Federal Reserve Bank of Atlanta and CEPR) and Douglas Hanley (University of Pittsburgh)

Discussant: Laurent Fresard (Universita della Svizzera italiana)

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Petra Moser (New York University)

Title: “Women in Science: Lesson from the Baby Boom”

How do children affect women in science? We investigate this question using rich biographical data, linked with patents and publications, for 83,000 American scientists in 1956 at the height of the baby boom. Our analyses reveal a unique life-cycle pattern of productivity for mothers. While other scientists peak in their mid-thirties, mothers become more productive after age 35 and maintain high productivity in their 40s and 50s. Event studies show that the output of mothers increases after 15 years of marriage, while other scientists peak in the first 10 years. Differences in the timing of productivity have important implications for tenure and participation. Just 27% of mothers who are academic scientists get tenure, compared with 48% of fathers and 46% of women without children. Mothers face comparable tenure rates to other assistant professors for the first six years but fall behind afterwards, suggesting that they face higher standards of early productivity. Mothers who survive in science are extremely positively selected: Compared with other married women, mothers patent (publish) 2.5 (1.4) times more before the median age at marriage. Compared with men, female scientists are more educated, half as likely to marry, onethird as likely to have children, but half as likely to survive in science. Employment records indicate that a generation of baby boom mothers was lost to science.

Presenter: Petra Moser (New York University)

Coauthors: Scott Daewon Kim (University of Pennsylvania)

Discussant: Pierre Azoulay (Massachusetts Institute of Technology)

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Raghu Rajan (University of Chicago, Booth)

Title: “Kill Zone”

Venture capitalists suggest that incumbent internet platforms create a kill zone around themselves, where any competing entrant is acquired quickly. Consequently, financing new startups becomes unprofitable. We construct a simple model that rationalizes the existence of a kill zone. The price at which an acquisition is done depends on the number of customers the entrant platform can attract if it remains independent, which in turn depends on the number of apps that have adapted to the platform. The prospect of a quick acquisition by the incumbent platform, however, reduces the app designers’ benefits from adaptation, making it harder for a technological superior entrant to acquire customers. This reduces the stand-alone price of the new entrant, decreasing the price at which they will be acquired, and thus reducing the incentives of VCs to finance their entry. We discuss the policy implications of this model.

Presenter: Raghu Rajan (University of Chicago)

Coauthors: Sai Krishna Kamepalli (Columbia University) and Luigi Zingales (University of Chicago)

Discussant: Florian Ederer (Yale University)

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Adair Morse (Berkeley, Haas)

Title: “Small Business Survival Capabilities and Policy Effectiveness”

Using unique City of Oakland data during COVID-19, we document that small business survival capabilities vary by firm size as a function of revenue resiliency, labor flexibility, and committed costs. Nonemployer businesses rely on low cost structures to survive 73% declines in own-store foot traffic. Microbusinesses (1-to-5 employees) depend on 14% greater revenue resiliency. Enterprises (6-to-50 employees) have twice-as-much labor flexibility, but face 11%-to-22% higher residual closure risk from committed costs. Finally, inconsistent with the spirit of ChettyFriedman-Hendren-Sterner (2020) and Granja-Makridis-Yannelis-Zwick (2020), PPP application success increased medium-run survival probability by 20.5%, but only for microbusinesses, arguing for size-targeting of policies.

Presenter: Adair Morse (University of California, Berkeley)

Coauthors: Robert P. Bartlett III (University of California at Berkeley)

Discussant: Christopher T. Stanton (Harvard Business School)

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