This paper delivers empirical evidence of how the informal authority of owner families determines the extent to which these can extract private benefits and secure preferential resource access. We argue that owner families in high power distance cultures enjoy increased informal authority. Consistent with our predictions, family firms in higher power distance countries display lower operating performance and are less likely to underinvest. Both effects are moderated by family ownership, family management involvement, and formal country-level governance mechanisms. Moreover, family firms in higher power distance countries are more commonly led by family members and pay lower costs of debt. Overall, our results emphasize the relevance of informal institutions for the economic outcomes and governance situation of family firms.
{"title":"Informal Authority and Economic Outcomes of Family Firms: An Issue of National Power Distance","authors":"Wolfgang Breuer, Andreas Knetsch","doi":"10.2139/ssrn.3500808","DOIUrl":"https://doi.org/10.2139/ssrn.3500808","url":null,"abstract":"This paper delivers empirical evidence of how the informal authority of owner families determines the extent to which these can extract private benefits and secure preferential resource access. We argue that owner families in high power distance cultures enjoy increased informal authority. Consistent with our predictions, family firms in higher power distance countries display lower operating performance and are less likely to underinvest. Both effects are moderated by family ownership, family management involvement, and formal country-level governance mechanisms. Moreover, family firms in higher power distance countries are more commonly led by family members and pay lower costs of debt. Overall, our results emphasize the relevance of informal institutions for the economic outcomes and governance situation of family firms.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"27 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85098124","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
P. Avramidis, George G. Pennacchi, Konstantinos Serfes, Kejia Wu
This paper analyzes how bank regulation that promotes greater access to credit impacts the financing of targeted small firms. It develops a model where banks compete with trade creditors to fund the operations of small firms and applies it to study the effects of the Community Reinvestment Act (CRA). The empirical tests reveal that, on average, a CRA-induced increase in bank loans reduces small firms’ use of relatively expensive trade credit. The effect is more profound in low- and medium-income areas where financial constraints are tighter due to low bank competition. The effect is also larger for small firms that operate in trade credit-dependent industries.
{"title":"The Role of Regulation and Bank Competition in Small Firm Financing: Evidence from the Community Reinvestment Act","authors":"P. Avramidis, George G. Pennacchi, Konstantinos Serfes, Kejia Wu","doi":"10.2139/ssrn.3779297","DOIUrl":"https://doi.org/10.2139/ssrn.3779297","url":null,"abstract":"This paper analyzes how bank regulation that promotes greater access to credit impacts the financing of targeted small firms. It develops a model where banks compete with trade creditors to fund the operations of small firms and applies it to study the effects of the Community Reinvestment Act (CRA). The empirical tests reveal that, on average, a CRA-induced increase in bank loans reduces small firms’ use of relatively expensive trade credit. The effect is more profound in low- and medium-income areas where financial constraints are tighter due to low bank competition. The effect is also larger for small firms that operate in trade credit-dependent industries.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"79 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-02-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83932025","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper seeks to investigate the existence and importance of collective intelligence to reduce information frictions by informing potential early-stage investors about venture quality. My context is an online platform where the community score projects, offering new insights into how the crowd affects subsequent venture success. I motivate my analysis using a statistical extraction model, which predicts that higher-scoring from the crowd signaling information about project quality, reducing information frictions to potential early-stage investors. To overcome the challenge of unobservables correlated with scoring, I leverage the quasi-random assignment of evaluators to project with different leniency, which leads to random variation in the overall score. Using this exogenous variation, I find no evidence that scoring from the crowd predicts subsequent venture success in the short and medium-run, but provides valuable information for entrepreneurs. In comparison, naïve OLS estimates show positive correlations between the aggregate score and subsequent venture survival and employment, suggesting selection bias. Overall, my findings suggest that the crowd is unlikely to be an effective choice for revealing information about venture quality and reducing information frictions.
{"title":"Information Frictions and Early-Stage Investors: Evidence from a Crowd-Rating Platform","authors":"Aurelien Quignon","doi":"10.2139/ssrn.3802679","DOIUrl":"https://doi.org/10.2139/ssrn.3802679","url":null,"abstract":"This paper seeks to investigate the existence and importance of collective intelligence to reduce information frictions by informing potential early-stage investors about venture quality. My context is an online platform where the community score projects, offering new insights into how the crowd affects subsequent venture success. I motivate my analysis using a statistical extraction model, which predicts that higher-scoring from the crowd signaling information about project quality, reducing information frictions to potential early-stage investors. To overcome the challenge of unobservables correlated with scoring, I leverage the quasi-random assignment of evaluators to project with different leniency, which leads to random variation in the overall score. Using this exogenous variation, I find no evidence that scoring from the crowd predicts subsequent venture success in the short and medium-run, but provides valuable information for entrepreneurs. In comparison, naïve OLS estimates show positive correlations between the aggregate score and subsequent venture survival and employment, suggesting selection bias. Overall, my findings suggest that the crowd is unlikely to be an effective choice for revealing information about venture quality and reducing information frictions.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"13 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-01-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89779522","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper provides a unified explanation for the existence, time-series variation, and recent boom of the Special Purpose Acquisition Company (SPAC). We begin by documenting four empirical patterns regarding U.S. SPACs: (1) SPAC issuance boomed in 2007 prior to the Global Financial Crisis and accelerated from 2015 to 2020. (2) The market share of SPACs is strongly positively correlated with equity market sentiment. (3) SPAC operating firms are smaller, younger, and riskier at the moment of going public than firms that IPO traditionally. (4) SPAC firms grow at similar or even higher rates compared to IPO firms in the three years after going public. We develop a theoretical framework of segmented going-public markets that can jointly explain these facts. Our model demonstrates that the SPAC and IPO market structures generate differing incentives for intermediaries in the two markets. SPAC sponsors act as non-bank certification intermediaries and match yield-seeking investors with smaller and riskier operating firms, while investment banks take larger and safer operating firms public in the traditional IPO market. Finally, given these findings, we discuss the importance of aligning sponsors with long-term investors and provide recommendations for an improved SPAC structure.
{"title":"Segmented Going-Public Markets and the Demand for SPACs","authors":"J. Bai, Angela C. Ma, Miles Zheng","doi":"10.2139/ssrn.3746490","DOIUrl":"https://doi.org/10.2139/ssrn.3746490","url":null,"abstract":"This paper provides a unified explanation for the existence, time-series variation, and recent boom of the Special Purpose Acquisition Company (SPAC). We begin by documenting four empirical patterns regarding U.S. SPACs: (1) SPAC issuance boomed in 2007 prior to the Global Financial Crisis and accelerated from 2015 to 2020. (2) The market share of SPACs is strongly positively correlated with equity market sentiment. (3) SPAC operating firms are smaller, younger, and riskier at the moment of going public than firms that IPO traditionally. (4) SPAC firms grow at similar or even higher rates compared to IPO firms in the three years after going public. We develop a theoretical framework of segmented going-public markets that can jointly explain these facts. Our model demonstrates that the SPAC and IPO market structures generate differing incentives for intermediaries in the two markets. SPAC sponsors act as non-bank certification intermediaries and match yield-seeking investors with smaller and riskier operating firms, while investment banks take larger and safer operating firms public in the traditional IPO market. Finally, given these findings, we discuss the importance of aligning sponsors with long-term investors and provide recommendations for an improved SPAC structure.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"8 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75176762","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Venture capital provides finance to undertakings that are generally very small, that are in the initial stages of their corporate existence and that display a strong potential for growth and expansion. In addition, venture capital funds provide undertakings with valuable expertise and knowledge, business contacts, brand equity and strategic advice. By providing finance and advice to those undertakings, venture capital funds stimulate economic growth, contribute to the creation of jobs and capital mobilization, foster the establishment and expansion of innovative undertakings, increase their investment in research and development and foster entrepreneurship, innovation and competitiveness.
To that end, the EuVECAR as an optional specialist regime available to alternative investment fund managers (‘AIFMs’) registered or authorized under the AIFMD was adopted. AIFMs managing qualifying venture capital funds (‘EuVECA’) can optionally opt into using the ‘EuVECA’ label for these funds and market them to professional, and certain high net-worth investors through the EU under the EuVECA marketing passport.
The EuVECAR establishes uniform rules, so that a clear demarcation line can be drawn between a qualifying venture capital fund and alternative investment funds (‘AIFs’) that engage in other, less specialized, investment strategies, which the EuVECAR is not seeking to promote. The EuVECAR establishes a uniform regulatory framework on the nature of EuVECAs, in particular on qualifying portfolio undertakings into which the qualifying venture capital funds are to be permitted to invest, and the investment instruments to be used. The EuVECAR is an optional regime. Where AIFMs do not wish to use the designation ‘EuVECA’ then the EuVECAR does not apply. In those cases, AIFMs may continue to base themselves upon labels under existing national rules and general EU law applies.
This contribution discusses the EuVECAR legal framework. To that end, Section 2 discusses the EuVECAR’s scope, including the relationship between Full AIFMs managing EuVECAs that are subject to the AIFMD and the ‘EuVECAR regime’ for Small AIFMs managing EuVECAs. Section 3 focuses on the EuVECAR and the relationship between ‘intermediary’, ‘product’ and ‘marketing/sales regulation’. These are elaborated in more detail in Section 4 (‘manager regulation’), Section 5 (‘depositary regulation’), and Section 6 (‘marketing & sales regulation’). Section 7 explains the registration regime for both Full/Small AIFMs intending to manage EuVECAs and the ‘product’ EuVECA itself and Section 8 concludes.
{"title":"The Regulation of European Venture Capital Funds (‘Euvecas’)","authors":"Sebastiaan Niels Hooghiemstra","doi":"10.2139/ssrn.3735293","DOIUrl":"https://doi.org/10.2139/ssrn.3735293","url":null,"abstract":"Venture capital provides finance to undertakings that are generally very small, that are in the initial stages of their corporate existence and that display a strong potential for growth and expansion. In addition, venture capital funds provide undertakings with valuable expertise and knowledge, business contacts, brand equity and strategic advice. By providing finance and advice to those undertakings, venture capital funds stimulate economic growth, contribute to the creation of jobs and capital mobilization, foster the establishment and expansion of innovative undertakings, increase their investment in research and development and foster entrepreneurship, innovation and competitiveness.<br><br>To that end, the EuVECAR as an optional specialist regime available to alternative investment fund managers (‘AIFMs’) registered or authorized under the AIFMD was adopted. AIFMs managing qualifying venture capital funds (‘EuVECA’) can optionally opt into using the ‘EuVECA’ label for these funds and market them to professional, and certain high net-worth investors through the EU under the EuVECA marketing passport.<br><br>The EuVECAR establishes uniform rules, so that a clear demarcation line can be drawn between a qualifying venture capital fund and alternative investment funds (‘AIFs’) that engage in other, less specialized, investment strategies, which the EuVECAR is not seeking to promote. The EuVECAR establishes a uniform regulatory framework on the nature of EuVECAs, in particular on qualifying portfolio undertakings into which the qualifying venture capital funds are to be permitted to invest, and the investment instruments to be used. The EuVECAR is an optional regime. Where AIFMs do not wish to use the designation ‘EuVECA’ then the EuVECAR does not apply. In those cases, AIFMs may continue to base themselves upon labels under existing national rules and general EU law applies.<br><br>This contribution discusses the EuVECAR legal framework. To that end, Section 2 discusses the EuVECAR’s scope, including the relationship between Full AIFMs managing EuVECAs that are subject to the AIFMD and the ‘EuVECAR regime’ for Small AIFMs managing EuVECAs. Section 3 focuses on the EuVECAR and the relationship between ‘intermediary’, ‘product’ and ‘marketing/sales regulation’. These are elaborated in more detail in Section 4 (‘manager regulation’), Section 5 (‘depositary regulation’), and Section 6 (‘marketing & sales regulation’). Section 7 explains the registration regime for both Full/Small AIFMs intending to manage EuVECAs and the ‘product’ EuVECA itself and Section 8 concludes.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"29 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78110625","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies how bank market power affects firm creation in innovative industries. Theoretically, I show that the effect of bank market power is ambiguous. I exploit a 2012 policy intervention in Italy, designed to foster firm creation in innovative industries through public bank guarantees. The policy increased firm creation in innovative industries by 50%, but the increase is more than halved in provinces where banking competition is weaker. I propose a new way to parsimoniously measure bank market power and competition at the local level, and I use both a difference-in-difference-in-differences (DDD) design and an Instrumental Variables (IV) approach on a dataset of newly incorporated firms in Italy between 2010 and 2015. I document that what drives the result is a weaker increase in the amount of guaranteed credit extended to innovative industries by banks. I conclude that banking competition is an important factor for the design of policies to foster innovative firm creation.
{"title":"Lend Me a Hand - Bank Market Power and Firm Creation in Innovative Industries","authors":"Fabrizio Core","doi":"10.2139/ssrn.3733765","DOIUrl":"https://doi.org/10.2139/ssrn.3733765","url":null,"abstract":"This paper studies how bank market power affects firm creation in innovative industries. Theoretically, I show that the effect of bank market power is ambiguous. I exploit a 2012 policy intervention in Italy, designed to foster firm creation in innovative industries through public bank guarantees. The policy increased firm creation in innovative industries by 50%, but the increase is more than halved in provinces where banking competition is weaker. I propose a new way to parsimoniously measure bank market power and competition at the local level, and I use both a difference-in-difference-in-differences (DDD) design and an Instrumental Variables (IV) approach on a dataset of newly incorporated firms in Italy between 2010 and 2015. I document that what drives the result is a weaker increase in the amount of guaranteed credit extended to innovative industries by banks. I conclude that banking competition is an important factor for the design of policies to foster innovative firm creation.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"20 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79478557","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Business accelerators provide startups with mentorship, networks, and training. They have rapidly emerged as prominent players in the entrepreneurial ecosystem. We argue accelerators are especially helpful for female entrepreneurs and may level the playing field for women in the venture market. We leverage a novel two-sided matching framework that controls for both sorting and selection and find that 1) women-founded startups are given, on average, lower company valuations during the for-profit admission process and therefore less likely to be admitted, however 2) conditional on graduation from accelerators, there is no evidence that women-founded ventures have a lower probability of receiving venture financing or being acquired. Our findings suggest that accelerators could improve returns by investing in more women-founded startups.
{"title":"Can Business Accelerators Level the Playing Field For Female Entrepreneurs? A Two-Sided Matching Approach Suggests Yes","authors":"Chuan Chen","doi":"10.2139/ssrn.3277691","DOIUrl":"https://doi.org/10.2139/ssrn.3277691","url":null,"abstract":"Business accelerators provide startups with mentorship, networks, and training. They have rapidly emerged as prominent players in the entrepreneurial ecosystem. We argue accelerators are especially helpful for female entrepreneurs and may level the playing field for women in the venture market. We leverage a novel two-sided matching framework that controls for both sorting and selection and find that 1) women-founded startups are given, on average, lower company valuations during the for-profit admission process and therefore less likely to be admitted, however<br>2) conditional on graduation from accelerators, there is no evidence that women-founded ventures have a lower probability of receiving venture financing or being acquired. Our findings suggest that accelerators could improve returns by investing in more women-founded startups.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"25 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73858429","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine whether the public availability of product market incumbents’ financial disclosures leads to greater capital structure mimicking of incumbents by entrants. Exploiting a change in disclosure enforcement for German private firms in the mid-2000s, we find entrant-incumbent mimicking rises substantially in concentrated markets once incumbents’ financial statements are publicly available. Additional tests exploring potential mechanisms are more consistent with interfirm learning underlying the effect than alternative channels. Our findings shed light on the effects of competitor financial statement disclosure on private firms’ initial financing decisions and highlight how capital structure dependencies among peer firms arise.
{"title":"Entry and Capital Structure Mimicking in Concentrated Markets: the Role of Incumbents' Financial Disclosures","authors":"Darren Bernard, Devrimi Kaya, J. Wertz","doi":"10.2139/ssrn.3269184","DOIUrl":"https://doi.org/10.2139/ssrn.3269184","url":null,"abstract":"We examine whether the public availability of product market incumbents’ financial disclosures leads to greater capital structure mimicking of incumbents by entrants. Exploiting a change in disclosure enforcement for German private firms in the mid-2000s, we find entrant-incumbent mimicking rises substantially in concentrated markets once incumbents’ financial statements are publicly available. Additional tests exploring potential mechanisms are more consistent with interfirm learning underlying the effect than alternative channels. Our findings shed light on the effects of competitor financial statement disclosure on private firms’ initial financing decisions and highlight how capital structure dependencies among peer firms arise.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"50 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88352049","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract We use administrative textual and non-textual data retrieved from publicly available archives to predict the performance of Danish startups at the time of foundation. The performance outcomes we consider are survival, high employment growth, a return on assets of above 20 percent, new patent applications and participation in an innovation subsidy program. We consider a base specification that includes variables for legal form, region, ownership and industry in all specifications and add variable sets representing firm names, business purpose statements (BPSs) as well as founder and startup characteristics. To forecast the two innovation-related performance outcomes well, we only need to include a set of variables derived from the BPS texts on top of the base variables while an accurate prediction of startup survival requires the combination of the firm names and the BPS variables along with founder characteristics. An accurate forecast of high employment growth needs the combination of the BPS variables and the founder characteristics. All information our forecasts require is likely to be easily obtainable since the underlying information is mandatory to report upon business registration in many countries. The substantial accuracy of our predictions for survival, employment growth, new patents and participation in innovation subsidy programs indicates ample scope for algorithmic scoring models as an additional pillar of funding and innovation support decisions.
{"title":"The Value of Publicly Available, Textual and Non-Textual Information for Startup Performance Prediction","authors":"Ulrich Kaiser, J. Kuhn","doi":"10.2139/ssrn.3570379","DOIUrl":"https://doi.org/10.2139/ssrn.3570379","url":null,"abstract":"Abstract We use administrative textual and non-textual data retrieved from publicly available archives to predict the performance of Danish startups at the time of foundation. The performance outcomes we consider are survival, high employment growth, a return on assets of above 20 percent, new patent applications and participation in an innovation subsidy program. We consider a base specification that includes variables for legal form, region, ownership and industry in all specifications and add variable sets representing firm names, business purpose statements (BPSs) as well as founder and startup characteristics. To forecast the two innovation-related performance outcomes well, we only need to include a set of variables derived from the BPS texts on top of the base variables while an accurate prediction of startup survival requires the combination of the firm names and the BPS variables along with founder characteristics. An accurate forecast of high employment growth needs the combination of the BPS variables and the founder characteristics. All information our forecasts require is likely to be easily obtainable since the underlying information is mandatory to report upon business registration in many countries. The substantial accuracy of our predictions for survival, employment growth, new patents and participation in innovation subsidy programs indicates ample scope for algorithmic scoring models as an additional pillar of funding and innovation support decisions.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"26 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85662641","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Whether returns of venture capital and private equity investments exhibit fat tails, particularly in the upper tail, affects how entrepreneurs and investors view the attractiveness of such investments. Using fund performance data, we propose and test a random growth model with a random initial valuation of funds to explain the observed distribution of funds’ residual-value and payout multiples. This model endogenously generates power-law tails in the cross-section from a log-normally distributed diffusion process and log-normally distributed birth valuation. We find that the resulting smooth double Pareto distribution fits the data better than competing log-normal or double Pareto models and generally performs well, apart from a small region around a valuation multiple of one. The divergence of the fitted distribution from the empirical one can be explained by an excess number of funds without distributions to investors – funds that may not have made or revalued any investments yet.
{"title":"The Smooth Double Pareto Distribution: A Model of Private Equity Fund Returns","authors":"Henry Lahr","doi":"10.2139/ssrn.3702903","DOIUrl":"https://doi.org/10.2139/ssrn.3702903","url":null,"abstract":"Whether returns of venture capital and private equity investments exhibit fat tails, particularly in the upper tail, affects how entrepreneurs and investors view the attractiveness of such investments. Using fund performance data, we propose and test a random growth model with a random initial valuation of funds to explain the observed distribution of funds’ residual-value and payout multiples. This model endogenously generates power-law tails in the cross-section from a log-normally distributed diffusion process and log-normally distributed birth valuation. We find that the resulting smooth double Pareto distribution fits the data better than competing log-normal or double Pareto models and generally performs well, apart from a small region around a valuation multiple of one. The divergence of the fitted distribution from the empirical one can be explained by an excess number of funds without distributions to investors – funds that may not have made or revalued any investments yet.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"10 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87001152","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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