Working papers

On the Importance of Accounting Information in Early-Stage Financing, with Aksel Mjos (Norwegian School of Economics) and David T. Robinson (Duke University and NBER)  

This paper asks whether available accounting information is important in early-stage financing. We use detailed administrative records from Norway to build a measure of a startup's ex ante innovation potential before it receives financing. This approach allows us to look beyond the set of venture-backed startups to circumvent the endogenous demand for accounting information. The lagged book value of equity, disaggregated into earnings and contributed capital, captures between 27% and 34% of the total variation in valuations across financing rounds. Current earnings not only aggregate the underlying non-financial firm characteristics but also contain incremental information. The latter relates more to the financing decision and amount than to the implied valuations per se. Overall, our findings speak to the importance of accounting information for reducing information asymmetries even in highly uncertain settings, in which investing based on ``gut feeling" may be the norm.

The Better Angels of Our Nature?, with Johan Karlsen (Norwegian School of Economics), Aksel Mjos (Norwegian School of Economics) and David T. Robinson (Duke University and NBER)  

This paper documents and explores the tremendous variation in investment performance for investors  in early-stage, ``high innovation potential" firms. Around 35% of investments are total losses, and only the top quarter generate a positive net return. Yet returns are so highly right-skewed that the average investment roughly doubles invested capital. Angel investments demonstrate pronounced performance persistence, and investor fixed effects explain about 45% of the total variation in angel investment performance -- far more than any observable factor. These ``better angels" -- those in the top performance quintile -- are better networked and also earn higher returns on public-market investments, but are not necessarily better at adding value.

Public Funding for Entrepreneurs: What Works Best? 

This paper simultaneously compares the effect of governmental grants, governmental loans and equity provided through governmental venture capital funds on entrepreneurial firms using administrative data from Norway. Governmental equity substantially increases firm's non-labor investments and its firm equity market value but does not have any effect on innovation output, employment or revenues. In contrast, governmental grants facilitate investments into high-skilled labor. Governmental loans have the most heterogeneous and positive impact: they stimulate the revenue-generating process and employment in previously non--revenue-generating firms, while they increase all investment activity in very early-stage firms. These findings highlight the importance of the incentives and repayment obligation attached to the provided financial instrument and have direct implications for policymakers tailoring policy designs to different stages of entrepreneurial firms' development.

Does Auditing Matter For Early-Stage Financing?, with Aksel Mjos (Norwegian School of Economics), Maximilian Müller (University of Cologne) and Ulrike Thürheimer (University of Amsterdam) 

This paper investigates whether voluntary audits reduce financing frictions in the equity capital market for early-stage firms, which is characterized by high information asymmetries. Motivated by agency and information theories, we explore when and under which conditions early-stage firms start to obtain a voluntary audit, and whether this has consequences for their equity financing outcomes. We use comprehensive administrative data on Norwegian private, early-stage firms and confidential data on their equity investments provided by the Norwegian Tax Authority. We find that the propensity to obtain a voluntary audit increases in the number of financing rounds involving outside equity and that, compared to a firm's choosing not to obtain an audit, choosing an audit voluntarily is associated with beneficial financing outcomes, including a higher propensity to secure future outside equity financing and larger amounts of outside equity financing. We attribute these results to the potential of the audit to reduce financing frictions. We do not find differences in equity financing outcomes between firms with voluntary and mandatory audits.

With a Little Help From My Family: Informal Startup Financing, with Brian K. Baik (Harvard Business School) and Johan Karlsen (Norwegian School of Economics) 

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.

Evaluating Selection Bias in Early-Stage Investment Returns, with Aksel Mjos (Norwegian School of Economics) and David T. Robinson (Duke University and NBER)  

This paper uses administrative records from the universe of new firm starts in Norway to build a repeat-sales time-series valuation index as a tool for gauging the extent to which observed financial returns are biased relative to true underlying returns in early-stage investments. We demonstrate that the bias is pronounced and contains two components. The venture/non-venture bias is small relative to the bias between firms with multiple rounds of financing and those with only a single round. This suggests that the technological pitfalls underlying their innovative processes are first order relative to the biases induced by matching into venture financing.

Established Public Firms Creating Newly Public Firms with Merih Sevilir (IWH Halle and ESMT Berlin) 

This paper examines the role of established publicly traded firms in the creation of newly innovative public firms. We document that 25% of startups going public in an initial public offering (IPO) are backed by at least one existing public firm. Public firms provide not only monetary capital to startups they finance but also they are important business customers to them. While startups backed up by public firms are younger, smaller, more R&D intensive and less profitable than only venture capital (VC)-backed startups at the time of their IPO, a greater percentage of them continue to survive as independent public companies. They raise greater amount of financing at their initial public offering (IPO) and experience larger first-day returns than their VC-backed counterparts. In addition, they exhibit similar levels of CAPEX and employment growth as VC-backed startups while they undertake greater R&D spending subsequent to becoming a public firm. The positive relation between having a public established firm as a financier and customer, and the R&D intensity of the startup going public is stronger in the post Sarbanes Oxley era. These results are consistent with established firms providing a distinct role in supporting startups, facilitating their access to public capital markets through an IPO, and contributing to the creation of newly public firms. Hence, our paper provides an alternative perspective to the current debate regarding the concern that established firms limit competition, innovation and entrepreneurship by conducting "killer acquisitions".

When in Firm Life Cycles do Earnings Become Predictable?, with Oliver Binz (ESMT Berlin) and Ally Xin Lin (ESMT Berlin) 

This study empirically evaluates whether earnings numbers created by the accounting system are useful for predicting the future performance of newly established firms. Inconsistent commentators' claims that earnings numbers of newly established firms are uninformative about future performance, we show that the earnings of such firms exhibit substantial persistence. We show that profitability starts mean-reverting with an average one-year (unconditional) persistence rate of almost 50% as early as at firm age two and overcomes most of the initial difference by age four. This is primarily driven by the operating profit margin and, particularly, by high persistence rates in revenues and personnel expenses. Venture capital-backed firms exhibit an upward reversion only and are fully converged (in median terms) by the age of six. While their revenue and personnel expenses persistence is slightly lower, capital expenditures exhibits a more persistent pattern in these firms. Overall, we show that profitability is persistent from the beginning of firm life and is, thus, useful in early-stage investment and lending decision-making processes.

Work in progress

Accounting Quality and Venture Capital Involvement, with Marti Guasch (ESADE) and Alexander Montag (Warwick Business School) - data analysis stage

Other publications

What Information do Startups Provide to Their Venture Capital Investors? with Malte Lorenz

Kisseleva, Katja, and Klaus Ruhnke, 2012, „Identifikation nahe stehender Personen im Rahmen der gesetzlichen Abschlusspruefung“ (Identification of related parties within the statutory annual audit), Die Wirtschaftsprüfung (65), 1079-1088.