My research is in empirical corporate finance, focusing on entrepreneurial finance, private equity, and financial intermediation. I am particularly interested in showing how various frictions affect the ability of start-ups to raise external financing and proposing solutions to these frictions.
I use novel data to document new facts on brokered startup offerings, where 60% of brokers are FINRA-registered, and 40% are unregistered "finders." Issuers with venture capitalists (VCs), accredited investors, and brokers in their zip code are more likely to match with brokers. While VCs seldom participate in brokered offerings, non-accredited investors heavily participate in offerings involving unregistered brokers. Using instrumental variables, data show that even though brokers help issuers raise funding, the issuers that use them have fewer successful exits and more closures post funding. Overall, these findings are consistent with brokers mitigating search costs for issuers left out of the market for VC funding.
- AFA 2022 (scheduled), Yale School of Management, Entrepreneurial Finance Association, University of Pennsylvania (Wharton), SEC (DERA), FINRA, University of Michigan, Indiana University, Purdue, Virginia Tech, Southern Methodist University, University of Iowa, Baruch College, University of South Carolina, University of Oklahoma, Kent State University, Rice University
Misconduct Synergies (with Heather Tookes) [Slides]
Do corporate control transactions discipline the labor force? We use the investment advisory industry as a laboratory to test for evidence of improvements in employee misconduct following M&A events (“misconduct synergies”). Consistent with synergies, we find that new disclosures of employee misconduct in the combined firm drop by between 25 and 34 percent following mergers. However, contrary to the idea that better-performing firms tend to purchase poor-performing ones, we find that both targets and acquirers have better misconduct records than the industry's average firm. Moreover, we find evidence of assortative matching on misconduct, where low (high) misconduct acquirers tend to purchase low (high) misconduct targets. This suggests complementarities, where target and acquirer mechanisms for monitoring and disciplining employees are more effective when used together and is consistent with Rhodes-Kropf and Robinson (2008). Indeed, target and acquiring firm employees have similar pre-merger misconduct records on average, but the sensitivity of employment separation to misconduct increases post-merger, suggesting improved disciplinary mechanisms.
- AFA 2022 (scheduled), European Finance Association (2021), University of Pennsylvania (Wharton), Indiana University, University of Michigan (Ross), the University of North Carolina (Kenan-Flagler), University of London (Cass), University of Texas (McCombs)
Racial Diversity in Private Capital Fundraising (with Johan Cassel and Josh Lerner)
Black- and Hispanic-owned funds control a very modest share of assets in the private capital industry, despite the fact that their performance is indistinguishable from other funds' returns. We explore this seeming paradox. We find that the size of the follow-on funds raised by minority managers is less sensitive to the performance of the previous fund than that of other private capital groups. The sensitivity of inflows to performance increases sharply during periods of high racial awareness. We also document minority-owned groups' difficulty in raising first-time funds. Together, the results support the hypothesis that the limited representation of Black- and Hispanic-owned firms in private capital stems at least partially from the nature of investor demand, rather than the supply of available fund managers.
- Dartmount Virtual Corporate Finance 2021 (scheduled), PERC 2021 (scheduled)
Startup Experience, Venture Capital Experience, and First-time Venture Fund Performance (with Shane Miller and David Brophy)
We study the sources of cross-sectional variation in the performance of first-time venture capital (VC) fund partners. We find that, relative to partners with startup experience, partners with VC experience are 25 percent more likely to invest in successful deals or start a follow-on fund. We investigate three potential mechanisms for this finding. Our tests do not support the hypotheses that partners with VC experience make riskier investments or have better deal-selection skills. Consistent with a network effect, we show that the higher success rate for partners with VC experience primarily comes from joining successful syndicates, not from leading successful deals. Our results suggest that a background in venture capital is an important channel for the success of first-time venture funds.
- PERC 2021 (scheduled), University of Michigan Ross (Brownbag)
The Dark Side of Local Representation (with Tarik Umar and Jefferson Duarte) draft available upon request
We exploit the Opportunity Zone (OZ) program to investigate how political bargaining affects central planners' allocations of resources across regions. Examining how governors selected regions for the OZ investment incentives, we find that stronger governors appear less concerned with backlash from county officials. Specifically, stronger governors varied OZ allocations more across counties by allocating OZs to 22% fewer small counties and 36% less uniformly across large counties. Instead, stronger governors follow the intent of the policy to a greater extent by allocating more OZs to poorer counties with more investment potential. Stronger governors did not allocate more OZs to counties with more donors and core or swing voters. OZs that were one-standard-deviation more likely to be selected by stronger governors than by weaker governors stimulated 97% (32%) more construction permits (equity issuances). Our findings suggest that, in general, stronger allocators are less compelled to compromise between harmony and economic efficiency.
- ASSA 2021, University of Michigan Public Policy, University of Colorado, Rice University, INFER Annual Conference 2020, 2020 Association for Public Policy Analysis, 76th Annual Congress of the IIPF, Econometric Society's World Congress, 9th International Industrial Organization and Spatial Economics Conference, Portuguese Finance Network International Conference, European Economic Association
Bank Loans and Bond Prices (with James Weston)
We test whether bank loans change public bond yields. A 10% increase in bank debt raises bond yields by 15bps, reflecting a trade-off between the benefits of bank cross-monitoring and higher bond risk. The effect is smaller for firms with no CDS and junk debt, where bank monitoring is most valuable. It is unlikely that firms with bank debt are riskier because they are less likely to be downgraded and have lower loan spreads. We find similar results using a natural experiment around the 2014 oil shock. Our results highlight how bond yields depend on the incentive conflicts among creditors.
- Southwestern Finance Association, Rice University Seminar Series, Financial Management Association, Midwestern Finance Association, Virginia Tech
Work in Progress
Alumni Networks, School Quality, and Entrepreneurial Outcomes (with Jon Garfinkel and Erik Mayer)
Black Inventors and the Innovation to Commercialization Cycle: The Role of Government and Private Funding (with Lisa Cook and Steven Wu-Chaves)
Discounting Restricted Securities, Journal of Financial and Quantitative Analysis, forthcoming. (with Tarik Umar and Rustam Zufarov)
We examine the costs of trading restrictions by exploiting an SEC rule change eliminating an ~80-day restriction period in private placements for small issuers. Using a difference-in-differences specification, we find that the restriction is binding, as dollar volume increases 19 percentage points vis-à-vis proceeds, and costly, as offering discounts fall by eight percentage points. Discounts fall more for issuers with higher information asymmetry or longer restriction periods. We account for endogenous responses to the rule change. Overall, our findings suggest that trading restrictions are costly and have large effects on firms' cost of capital.
- Rice University Seminar Series, Lone Star Finance Conference, Southwestern Finance Association