Research

Publications

Investor Tax Credits and Entrepreneurship: Evidence from U.S. States, with Sabrina Howell, Filippo Mezzanotti, Xinxin Wang, and Ting Xu

Journal of Finance, 2023, 78(5), 2621-2671

Best Paper Award, Mid-Atlantic Research Conference

Presentations:  Barcelona GSE Summer Forum, Young Scholars Finance Consortium, Mid-Atlantic Research Conference, AFA Conference, NBER Conference on Business Taxation in a Federal System, Red Rock Finance Conference, Northeastern University Finance Conference, MFA Conference, WFA Conference, FIRS Conference (canceled), Finance in the Cloud II, Southern California PE Conference, ASU Sonoran Winter Finance Conference, Jackson Hole Finance Group Conference, 8th HEC Paris Entrepreneurship Workshop, Duke-UNC Innovation and Entrepreneurship Research Symposium, Carnegie Mellon University, UNC Entrepreneurship Working Group, Third Junior Entrepreneurial Finance and Innovation Workshop

Media coverage: KelloggInsight

Angel investor tax credits are used globally to spur high-growth entrepreneurship. Exploiting their staggered implementation in 31 U.S. states, we find that they increase angel investment yet have no significant impact on entrepreneurial activity. Two mechanisms explain these results: crowding out of alternative financing and low sensitivity of professional investors to tax credits. With a large-scale survey and a stylized model, we show that low responsiveness among professional angels may reflect the fat-tailed return distributions that characterize high-growth startups. The results contrast with evidence that direct subsidies to firms have positive effects, raising concerns about promoting entrepreneurship with investor subsidies.

Political Influence and the Renegotiation of Government Contracts, with Jonathan Brogaard and Ran Duchin

Review of Financial Studies, 2021, 34(6), 3095-3137

Presentations: Tefler Annual Conference on Accounting and Finance, University of Pittsburgh, AFA Conference, WFA Conference, Finance Down Under Conference, IDC Herzliya Summer Finance Conference, UNC-Duke Corporate Finance Conference, University of Washington Faculty Brown Bag, SIFR Conference on Innovation and Entrepreneurship

This paper provides novel evidence that corporate political influence operates through renegotiations of existing government contracts. Using detailed data on contractual terms and renegotiations around sudden deaths and resignations of local politicians, the estimates show that politically connected firms initially bid low and successfully renegotiate contract amounts, deadlines, and incentives. The effects hold across different industries and contract types, enhance firm value, and persist around the exogenous increase in contract supply due to the American Recovery and Reinvestment Act of 2009. Overall, this paper puts forth an unexplored link between political influence, ex-post renegotiations and ex-ante bidding of government contracts.

Thirty Years of Shareholder Activism: A Survey of Empirical Research, with Jonathan M. Karpoff and Victoria B. McWilliams

Journal of Corporate Finance, 2017, 44, 405-424

We summarize and synthesize the results from 73 studies that examine the consequences of shareholder activism for targeted firms, and draw two primary conclusions. First, activism that adopts some characteristics of corporate takeovers, especially significant stockholdings, is associated with improvements in share values and firm operations. Activism that is not associated with the formation of ownership blocks is associated with insignificant or very small changes in target firm value. Second, shareholder activism has become more value increasing over time. Research based on shareholder activism from the 1980s and 1990s generally finds few consequential effects, while activism in more recent years is more frequently associated with increased share values and operating performance. These results are consistent with Alchian and Demsetz' (1972) argument that managerial agency problems are controlled in part by dynamic changes in ownership, and with Alchian's (1950) observation that business practices adapt over time to mimic successful strategies.

Deficits, Public Debt Dynamics and Tax and Spending Multipliers, with Gauti B. Eggertsson and Sophia Gilbukh

The Economic Journal, 2013, 123(566), 133-163

Cutting government spending can increase the budget deficit at zero interest rates according to a standard New Keynesian model, calibrated with Bayesian methods. Similarly, increasing sales taxes can increase the budget deficit rather than reducing it. Both results suggest limitations of austerity measures. At zero interest rates, running budget deficits can be either expansionary or contractionary depending on how they interact with expectations about long-run taxes and spending. The effect of fiscal policy action is thus highly dependent on the policy regime. A successful stimulus, therefore, needs to specify how the budget is managed not only in the short but also medium and long run.

Working Papers

Entrepreneurship and the Platform Economy: Evidence from U.S. Tax Returns, with Spyridon Lagaras and Margarita Tsoutsoura

Revise & Resubmit at the Journal of Financial Economics

W.E. Upjohn Institute for Employment Research Early Career Research Award

Presentations:  University of Michigan, University of Maryland, North Carolina State University, University of Oregon, Boston College, University of Oxfora, Georgia Tech/FRB Household Finance Conference, FIRS Conference, MFA Conference, NBER Entrepreneurship Fall Meeting, ECB-CEPR Labour Market Workshop, Finance, Organizations and Markets Conference, NFA Conference, Corporate Finance Day, Red Rock Finance Conference, CEPR Endless Summer Conference on Financial Intermediation and Corporate Finance, WFA Conference, LBS Summer Finance Symposium, Munich Summer Institute, Northeastern University Finance Conference, Labor and Finance Group Conference, FSU SunTrust Beach Conference, Craig Holden Memorial Finance Conference, RCFS Winter Conference, U.S. Department of Treasury's Office of Tax Analysis

Platform intermediation of goods and services has considerably transformed the U.S. economy. We use administrative data on U.S. tax returns to study the effect of the gig economy on entrepreneurship. We find that gig workers are more likely to become entrepreneurs, particularly those who are lower income, younger, and benefit from flexibility. We track all newly created firms in the economy and show that the gig economy facilitates learning by potential entrepreneurs who experiment with starting riskier firms. Overall, our findings provide novel evidence about how on-the-job learning promotes entrepreneurial entry and shifts the type of firms started by entrepreneurs.

Private Equity Fund Debt: Agency Costs and Cash Flow Management, with James F. Albertus

Revise & Resubmit at the Journal of Financial and Quantitative Analysis

Presentations: EFA Conference, NBER Entrepreneurship Summer Institute, Southern California PE Conference, Private Equity Research Consortium (PERC) Symposium, Carnegie Mellon University

Media coverage: Institutional Investor, Wall Street Journal Pro, Institutional Investor

We study the emergence of private equity fund debt and its impact on cash flows, performance, and agency relationships. Funds using debt delay capital calls, boosting performance measures sensitive to cash flow timing. They also call capital less frequently. We find that general partners use fund debt during fundraising to increase the likelihood of raising a follow-on fund and near the hurdle rate to increase their carried interest compensation, indicating that fund debt exacerbates agency conflicts in private equity. A large-scale survey of general partners and limited partners suggests that fund debt facilitates cash flow management and amplifies agency conflicts.

Does Size Matter? The Real Effects of Subsidizing Small Firms, with Ran Duchin and John Hackney

Presentations: Federal Reserve Bank of Atlanta, Jackson Hole Finance Group Conference, NBER Entrepreneurship Summer Institute, WFA Conference, Mid-Atlantic Research Conference, MFA Conference, American University, Virtual Finance Seminar, Junior Entrepreneurial Finance/Innovation Lunch Group, Carnegie Mellon University, International Conference of Taiwan Finance Association, Joint Finance Seminar by Universities of Bonn, Dortmund, and Wuppertal, RCFS/RAPS Winter Conference, University of International Business and Economics (UIBE) Conference, University of Alberta, Indiana University, University of South Carolina

We estimate the economic effects of small business subsidies in the United States. The analyses focus on vast changes in industry size standards, which determine small firms’ eligibility for federal subsidies, and exploit randomness in the timing of size standard changes across industries following the Small Business Jobs Act of 2010. We find that size standards have increased considerably over the past decade, leading to a crowding out of the smallest firms, as reflected by lower shares of small businesses in employment and payroll. Consequently, business dynamism, measured by establishment expansions and contractions, declines. Furthermore, employment growth decreases, wages drop, and displaced workers become unemployed. We provide micro-level evidence from large government subsidy programs, including procurement contracts, guaranteed credit, and the Paycheck Protection Program, that the allocation of subsidies to the smallest firms has declined. Overall, we provide causal estimates that small business subsidies support job creation and economic growth.

When Do Firms Risk Shift? Evidence from Venture Capital

Presentations: Vanderbilt University, Institute for Private Capital Spring Research Symposium, Finance Down Under Conference, AFA Conference, University of Alberta, Arizona State University, Temple University, University of Toronto, American University, University of Florida, University of Nebraska, University of Houston, Carnegie Mellon University, Financial Management Association Doctoral Consortium and Student Paper Presentation, University of Washington

This paper studies the agency costs of debt and the role of risk shifting as firms face financial distress. The Small Business Investment Company (SBIC) program is a novel setting to evaluate the importance of these costs. It provides participating venture capital funds with debt financing from the U.S. government at a negligible premium to the 10-year Treasury Note. Economic mechanisms that might prevent risk shifting, such as covenants and reputation concerns, are primarily not present in this program. Using a difference-in-differences setting, I find that managers of distressed funds invest in firms with lower credit scores, sales, employment and patenting activity, and are more likely to use equity investments. Distressed funds reallocate capital to riskier firms in their portfolio, rather than searching for new investments. Equityholders respond positively to riskier investments for distressed funds and debtholder losses increase, consistent with the prediction that risk shifting transfers wealth from bondholders to equityholders.

Racial Dynamics in the U.S.: Evidence from the Stock Market, with Duane Seppi

Presentations: EFA Conference, Wayne State University, Columbia University News and Finance Conference, CMU/Pitt/PSU Conference, Carnegie Mellon University

Racial dynamics in American society are evolving driven by recent law-enforcement-linked Black deaths, Black Lives Matter protests, debates about Confederate monuments, and other race-related events. Using stock-price responses to race-related events, we show that changes in bias and diversity affect U.S. firms. We estimate the cumulative abnormal return for all race-related events is 2.6% over our sample period. These effects are larger at firms with low diversity in terms of leadership, labor markets, and operations, and amplified at firms that are more sensitive to social pressure. Additionally, we find a structural break after the highly-visible murder of George Floyd.

First Come, First Served: The Timing of Government Support and Its Impact on Firms, with Spyridon Lagaras and Margarita Tsoutsoura

Presentations:  ECGI Corporations and Covid-19 Conference, ICEA Public Policy Lessons Conference, Kent State University, FMA Conference, University of British Columbia, Cornell University, Carnegie Mellon University

Featured in:  2022 Trends in Entrepreneurship Report

We study the effects of deploying government capital to firms during crises. Using exogenous variation in the timing of disbursements in the Paycheck Protection Program (PPP), we find that firms receiving PPP loans later become more financially distressed and face reductions in credit supply. These effects are amplified for firms with heightened financial constraints. We also show that firms receiving loans later have lower economic activity using in-store activity and shutdowns. The results are consistent with a direct channel on firm operations and a financing channel. Overall, our findings highlight the role of timely and uninterrupted fiscal support during crises.

Disclosure in Democracy, with Madeline Marco Scanlon and Florian Schulz

Presentations: AEA Conference, NBER Political Economy Summer Institute, London Political Finance Workshop

Using hand-collected data on political contributions from undisclosed sources, we document novel stylized facts on "dark money" and its role in elections and politician type. Over the past decade, dark money has become a major source of campaign financing and currently comprises the largest source of capital from special interest groups. Consistent with evading disclosure, dark money is spent just before an election and often transferred to other special interest groups. We show that dark money is more likely to support candidates in competitive races and in areas with reduced information environments, lower education, greater inequality, and less poverty. Exploiting variation in exposure to television advertisements, we find that candidates supported by dark money advertisements receive an increase in votes and are more likely to win elections. While politicians supported by dark money organizations are more likely to engage in the political process by voting for and sponsoring legislation aligned with business interests, they are also more likely to be subsequently voted out of office, suggesting that they may enact an agenda focused on their donors rather than their constituents. Taken together, our results provide the first systematic evidence on the rise and impact of dark money in U.S. congressional elections, contributing to the ongoing debate about disclosure requirements of political spending.

Merger Waves and Innovation Cycles: Evidence from Patent Expirations, with Ran Duchin and Jarrad Harford

Presentations: Seventh Annual Mergers and Acquisitions Research Centre Conference, University of Oklahoma Workshop in Entrepreneurship and Finance, FSU SunTrust Beach Conference, AFA Conference, Ohio University

We investigate the link between innovation cycles and aggregate merger activity using data on patent expirations. To isolate the treatment effect of patent expirations, we focus on term expirations, which occur mandatorily at a pre-specified date. We find strong clustering in industry patent expirations (“patent expiration waves”). These patent waves trigger industry merger waves with lower announcement returns and worse long-term performance for acquirers, but higher announcement returns and larger premiums for targets. We also find that the acquirers in this type of merger wave experience declines in their profit margins, cash holdings and investment opportunities, while cutting costs and boosting investment in the year prior to a merger. Overall, we put forth a possible link, unexplored in the literature, between merger waves and patenting activity.

Do Political Boundaries affect Firm Boundaries?, with Raymond J. Fisman, Florian Schulz, and Vikrant Vig

Presentations: AFA Conference, FIRS Conference, European Summer Symposium in Financial Markets (ESSFM), UBC Winter Finance Conference, CMU/Pitt/Penn State/OSU Conference

We investigate how changes in legislative boundaries affect firms in the U.S.  Every decade, states redraw their congressional districts to account for changing population dynamics within the state and across the country. We find that redistricting imposes considerable costs on firms that operate in districts whose boundaries change. At the state level, we document that firm-level uncertainty  significantly increases when new district lines are drawn.  Additionally, firms affected by these new boundaries experience negative abnormal equity returns.  Within a state, we examine firms who experience a change in representation due to redistricting relative to those firms whose representation is unaffected.  We find that redistricted firms decrease capital expenditures and investment in R&D, and there is a higher likelihood of subsequently relocating.  These effects are stronger for standalone firms.  Taken together, this paper provides evidence about the link between political boundaries and the boundaries of firms.

The Politics of Corporate Investment: Evidence from Political Turnovers and IPO Proceeds, with Ran Duchin, Hongbo Pan, and Wei Shi

Presentations: WFA Conference, CICF Conference

Using project-level data on changes in firms’ investments of IPO proceeds around deaths, term limits, and mandatory retirements of local politicians, this paper studies corporate investment as a novel channel of political activity. Following exogenous turnovers of local Chinese politicians, firms initiate new projects and modify existing projects to cater to incoming politicians. Subsequently, they obtain better access to bank credit, higher government subsidies, lower effective tax rates, and better performance. Furthermore, their top managers are more likely to be elected to political office. These effects, however, are followed by increases in local fiscal deficits.