Research
(with Matthew Denes, Sabrina Howell, Filippo Mezzanotti, and Ting Xu)
Revise & Resubmit, Journal of Finance
This paper subsumes two prior working papers: Denes, Wang, and Xu (2019) and Howell and Mezzanotti (2019)
Angel investor tax credits are used globally to spur high-growth entrepreneurship. Exploiting the staggered implementation of these tax credits in 31 U.S. states, we find that while they increase angel investment, they have no significant effect on entrepreneurial activity. Tax credits induce entry by inexperienced, local investors and are often used by insiders. A survey of 1,411 angel investors suggests that a “home run” investing approach alongside coordination and information frictions explain low take-up among experienced investors. The results contrast with evidence that direct subsidies to firms have large positive effects, raising concerns about using investor subsidies to promote entrepreneurship.
Hidden Performance: Salary History Bans and the Gender Wage Gap
(with Jesse Davis and Paige Ouimet)
Revise & Resubmit, Journal of Corporate Finance Studies
As of 2019, salary history bans (SHBs) have been enacted by 17 states and Puerto Rico with the stated purpose of reducing the gender pay gap. However, it is theoretically ambiguous whether SHBs will reduce the gender pay gap. Instead, we argue the effect on wages will depend on the ability of firms to accurately back out the impact of discrimination in historical wages, the bias in alternative signals of worker productivity, the impact of greater uncertainty on the wage-setting process and increasing adverse selection in the set of new hires. Using novel disaggregated wage data covering all public sector employees in 36 states, we show that salary history bans lead to an increase in the gender wage gap.
Start-up entrepreneurs depend on M&A markets to exit VC investments. I test a novel catering theory of innovation: Does the market structure of potential acquirers impact entrepreneurial decision-making? Using CrunchBase and LinkedIn data, I find that a standard deviation increase in acquirer market concentration decreases the propensity to become an entrepreneur by 4%, suggesting that fragmented markets are appealing entry markets. Likewise, a standard deviation increase in acquirer concentration increases the catering of entrepreneurs by 9%, as measured by technological overlap with potential acquirers. Catering comes at the cost of breakthrough innovation (16% decrease), the key determinant of economic growth.
(with Jesse Davis and Adair Morse)
Early-stage firms utilize venture debt in one-third of financing rounds despite their general lack of cash flow and collateral. In our model, we show how venture debt aligns incentives within a firm. We derive a novel theoretical channel in which runway extension through debt increases firm value while potentially lowering closure. Consistent with the model's mechanism, we find that dilution predicts venture debt issuance. Empirically, treatment with venture debt lowers closure hazard by 1.6-4.4% and increases successful exits by 4.3-5.3%. Back-of-the-envelope calculations suggest $41B, or 9.4% of invested capital, remains productive due to venture debt.
(With Adair Morse)
In May 2016, Regulation Crowdfunding (RegCF) opened the possibility for individuals to invest in equity claims on Silicon-Valley-like startups. Compared to a set of angel, accelerator and VC-funded startups, these RegCF startups offer lower deal value (equity stake per dollar invested). However, RegCF startups reflect a heterogeneity of outcomes, reflecting a framing of the utility of investing over financial returns, consumption, and effort. Some RegCF startups (e.g., gaming, food service) offer a mixture of pure financial returns with consumption utility akin to Indiegogo/Kickstarter product offerings. Other RegCF startups exhibit fewer failures but offer lower deal value, reflecting a lower required return demanded by RegCF investors who do not exert costly value-add effort of VCs. Finally, a third set exhibit lower future funding and higher closures, consistent with these startups being failures from the formal VC market (snares). RegCF can be understood as sometimes opening opportunities, but not with the same financial return prospects faced as VC firms.
Market Power in Merger Announcement Returns
(with Ulrike Malmendier, draft available upon request)
We provide evidence that a significant portion of the returns to merger announcements are explained by changes in market power resulting from the merger. Using a large sample of completed mergers from 1980 to 2012, we compute the expected and actual change in concentration for each merger. We find that a 0.1 expected increase in concentration measured using the Herfindahl index leads to a 2.3% increase in cumulative abnormal returns over a three-day period. Actual increase in concentration, on the other hand, does not have any effect on abnormal returns. In the long-run, the results are reversed. Expected changes in concentration does not predict long-run returns whereas actual changes in concentration positively predict long-run returns. We attribute the results to investors not fully internalizing the impact of market power in mergers.