Research

Busy Venture Capitalists and Investment Performance 

Journal of Financial and Quantitative Analysis, Forthcoming

This paper studies the impact of limited attention on investment decisions by venture capitalists (VCs). I find that startups funded by VCs during VCs' IPO engagements tend to underperform: these startups are 9% less likely to go public or become acquired and have lower exit multiples. The effects of VCs' busyness cluster around the active phase of the IPO engagement and are more pronounced in cases of higher workload intensity or higher information asymmetry. Overall, this performance gap induced by attention constraints provides new evidence on VCs' ability to identify investment opportunities at the initial screening stage. 

Presentations:   SFS Cavalcade North America 2020,  PERC Private Equity Research Symposium (Oxford, 2019), Annual Private Capital Research Conference (Montreux, 2019), KWC Conference on Entrepreneurial Finance (Lund, 2019), FMA (2019), BI Oslo, Copenhagen Business School, U of Lausanne, HKU Business School, IE Business School, Tilburg, U of Amsterdam, U of Geneva, U of Iowa Tippie College of Business, UVA Darden, VU Amsterdam 

Media coverage: Institutional Investor, Canadian Investment Review

The Value of Privacy and the Choice of Limited Partners by Venture Capitalists  with Will Gornall and Ilya Strebulaev

Journal of Financial Economics, Conditionally Accepted

We study how information disclosure concerns shape the choice of limited partners by venture capitalists (VCs). Late-2002 court rulings prevented public investors from providing confidentiality to investment managers. The best-performing VCs, but not other managers, responded by excluding public investors from their new funds. Lost access reduced public investor returns by $1.6 billion relative to $14 billion of their VC commitments. Access was restored by ensuing legislation that reduced disclosure requirements and by contractual innovations allowing VCs to provide less information to their public investors, with both changes focusing on protecting portfolio company information. 

Presentations: 34th Mitsui Finance Symposium (2023), SFS Cavalcade North America 2023, MFA 2023, IPC Spring Research Symposium 2023, Commonwealth Finance Workshop 2022, European FA 2022 (Barcelona), PERC Private Equity Research Symposium (Oxford, 2022), Esade Business School*, Stanford PhD Seminar

* co-author

Media coverage: The FinReg Blog

Do Banks Compete on Non-Price Terms? Evidence from Loan Covenants   with Christoph Herpfer and Roberto Steri

We investigate the tradeoff between control rights tied to loan covenants and cash flow rights from interest rates. We exploit a regulatory shock that restricted banks, but not non-banks, from offering covenant-lite loans. In response, affected banks increased covenant provisions while reducing interest rates relative to non-banks. We estimate a "dollar value of covenants" around 2.5%, or $15mln annually for the average loan. This value rises with borrowers' demand for flexibility and falls with lenders' ability to monitor covenants. Stricter non-price terms drive financially weaker borrowers toward shadow banks or out of the leveraged lending market, reducing banks' market share. 

Presentations: ABFER 2023*, Regulating Financial Markets Conference* (Frankfurt am Main, 2022), SFS Cavalcade North America 2022*,  AFA 2021 (Chicago)*,  EFA 2020 (Helsinki), MFA 2020 (Chicago)*, 8th Empirical Financial Intermediation (EFI) Workshop (2019)*,  Federal Reserve Bank of Atlanta (2018)*,  Central Bank of Ireland (2018),  Emory (2018)*, GeorgiaTech (2018)*,  U of Lausanne (2018) 

* co-author

Overallocated Investors and Secondary Transactions  with Aleks Andonov and Josh Lerner

We study how portfolio rebalancing needs drive secondary transactions of illiquid stakes in private equity (PE) partnerships. To identify secondary sales of limited partner (LP) interests, we use the return reporting patterns of public investors for funds underlying their portfolio. We find that pensions overallocated in PE tend to sell their stakes in the secondary market, rather than increasing their target allocation or reducing the number of new commitments. The evidence from the distribution of discounts highlights the costs of this denominator effect due to self-imposed portfolio rebalancing policies at public plans.

Presentations: IPC Spring Research Symposium 2024 (UNC, Chapel Hill), Private Capital Symposium at London Business School*, Annual Private Markets Conference (Lausanne)*, The Law and Finance of Private Equity and Venture Capital Conference (UPenn), 5th LTI@UniTO/Bank of Italy Workshop on Long-term investors’ trends: theory and practice (Rome), The Ninth Public Investors Conference (Singapore), Inquire Europe Autumn Seminar 2024 (Valencia)

* co-author

Selling to Yourself: Continuation Vehicles in Private Equity  with Will Gornall and Ilya Strebulaev

This paper presents the first study of an emerging market trend: managers selling assets from one of their funds into a new continuation vehicle (CV) they manage, with existing limited partners being able to cash out or continue to hold. We comment on agency theories by analyzing data on continuation funds and transferred assets. CVs tend to be used by more successful funds and general partners and appear to contain higher quality assets, potentially as a response to asymmetric information challenges. Flexibility appears to be a key driver of limited partner investment decisions, with fund of funds being more likely to participate in CVs. 

Discussions

Competition for Talent: The Impact of Venture Capital Flows on Incumbent Firms by Linghang Zeng (Babson College), KWC Conference on Entrepreneurial Finance

Board Dynamics over the Startup Life Cycle by Michael Ewens (Caltech) and Nadya Malenko (Michigan Ross), FIRS

Corporate Venture Capital and Firm Scope by Yifei Zhang (Toulouse School of Economics), MFA

Race, Discrimination, and Hedge Funds by Yan Lu (U of Central Florida), Narayan Naik (LBS), and Melvyn Teo (SMU Singapore), Annual Hedge Fund Conference

Size, returns and value added: Do private equity firms allocate capital according to manager skill? by Reiner Braun (TUM), Nils Dorau (TUM), Tim Jenkinson (U of Oxford), and Daniel Urban (Erasmus) , Columbia Private Equity Conference

Funding Black High-Growth Startups by Lisa Cook (Board), Matt Marx (Cornell), Emmanuel Yimfor (U of Michigan), MFA

Initial Public Offerings and Product Market Dynamics: New Perspectives from the Nielsen Retail Scanner Data by Xi Chen (U of Houston), Jingxuan Zhang (Boston College), MFA

How Venture Capitalists and Startups Bet on Each Other: Evidence From an Experimental System by Mehran Ebrahimian (SSE) and Ye Zhang (SSE), WFA

Conflicting Fiduciary Duties and Fire Sales of VC-backed Start-ups by Bo Bian (UBC), Casimiro Nigro (Goethe University), and Yingxiang Li (UBC), EFA

How Can Monitoring Benefit Investors? Evidence from 85 Billion Cell Phone Signals by Jack Fu (University of Pennsylvania), MFA

The Dynamics of Venture Capital Syndicates: The Effect of Prior Collaboration among VCs on Value Addition to Entrepreneurial Firms by Thomas Chemmanur (Boston College), Jiajie Xu (U of Iowa), Jingxuan Zhang (U o Alberta), and Xiang Zheng (University of Connecticut), Private Markets Research Conference

Networks in Venture Capital Markets by Can Huang (UIUC), FMA