« Back to Results
Hilton Atlanta, Grand Ballroom A
Hosted By:
American Finance Association
Entrepreneurial Finance/Venture Capital
Paper Session
Sunday, Jan. 6, 2019 10:15 AM - 12:15 PM
- Chair: Shai Bernstein, Stanford University
Entrepreneurial Wages
Abstract
Why do young firms pay less? Previous studies have argued that employees willingly accept lower wages at new firms in response to offsetting benefits. A second literature argues that lower wages at new firms are driven by selection of lower quality workers into new firms, firms which are likely to be of lower productivity or financially constrained. Using US Census employer-employee matched data, we show new evidence consistent with the selection argument. After including worker fixed effects, nearly three quarters of the new firm wage difference disappears. Moreover, once we control for firm fixed effects, absorbing time invariant firm quality, the wage difference between new and established firms becomes economically unimportant. Overall, our findings indicate that, for a given worker who has job opportunities at similar quality new and established firms, the expected wage penalty of working at the new firm is, on average, economically insignificant. Moreover, young firms that can hire high quality workers have higher future survival rates and total employment, suggesting that human capital is an important predictor of young firm success.Investing Outside the Box: Evidence from Alternative Vehicles in Private Capital
Abstract
This paper undertakes a comprehensive analysis of alternative investment vehicles in private equity, using unexplored custodial data about 112 limited partners over four decades. We differentiate between alternative vehicles that are GP-directed versus those where the LP has some discretion. Of the roughly 5500 distinct investments made by the LPs in our sample, 32% of investments (17% of capital commitments) were in such alternative vehicles; the allocation increased by more than 10 percentage points over the last decade. Alternative vehicles were far more likely to be offered by larger and North America-based buyout funds. The average performance of these alternative vehicles lagged that of the GPs’ corresponding main funds. The best LP performance was among endowments, private pensions, and insurers. Finally, LPs with better past performance invested in alternative vehicles with better performance, even after conditioning on the GPs’ past records. This result suggests that bargaining between GPs and LPs leads to gradation in investment performance based on the parties’ outside options.Venture Capital Contracts
Abstract
We develop a dynamic search and matching model to estimate the impact of venture capital (VC) contract terms on start-up outcomes, and the distribution of value between entrepreneur and investor, in the presence of endogenous selection. We estimate the model on a new, large data set of first financing rounds of start-up companies. Consistent with efficient contracting theories, we find an optimal equity split between VC and entrepreneur that maximizes the probability of success. However, VCs use their bargaining power to receive more investor-friendly terms compared to the contract that maximizes start-up value. Nevertheless, better VCs still benefit the start-up and the entrepreneur, due to their positive value creation. In counterfactuals, eliminating certain contract terms benefits entrepreneurs but reduces the number of deals in the market. Lowering search frictions benefits investors at the expense of entrepreneurs.Discussant(s)
Manuel Adelino
,
Duke University
Song Ma
,
Yale University
Adair Morse
,
University of California-Berkeley
Will Gornall
,
University of British Columbia
JEL Classifications
- G2 - Financial Institutions and Services