Geraldo Cerqueiro, Universidade Catolica Portuguesa, and Maria Fabiana Penas, Tilburg University
How Does Personal Bankruptcy Law Affect Start-ups?
Cerqueiro and Fabiana Penas exploit cross-sectional and times-series changes in U.S. state exemption levels to analyze the effect of debtor protection on a start-up's financing sources. The authors find that both the equilibrium level of formal debt and the ratio of formal debt to total financing are lower in states with higher exemption levels. The decrease in debt financing is compensated for by an increase in funding from informal sources, including the firm owners, family, and friends. Also, firms located in high-exemption states start smaller and are more likely to fail. The authors consider two possible explanations for their results. First, a reduction in the supply of credit may more than compensate for a potential increase in the demand for credit by risk-averse borrowers. Second, there may exist an adverse-selection mechanism, whereby low-skilled entrepreneurs are attracted to high-exemption states. The evidence in this study strongly points to a reduction in credit availability as the main driver of the results. Finally, while exemptions negatively affect the supply of credit for both unlimited-liability and limited-liability start-ups, they positively affect the demand for credit from unlimited liability start-ups only.
Lee G. Branstetter, Carnegie Mellon University and NBER; Francisco Lima and Ana Venancio, Technical University of Lisbon; and Lowell Taylor, Carnegie Mellon University
Do Entry Regulations Deter Entrepreneurship and Job Creation? Evidence from Recent Reforms in Portugal(NBER Working Paper No. 16473)
Recent research has suggested that a reduction in entry regulation can promote firm entry and job creation, but little is known about the characteristics of the firms and jobs created through these reforms. To shed light on this question, Branstetter, Lima, Taylor, and Venancio use data from Portugal, which implemented one of the most dramatic and thorough policies of entry deregulation in the industrialized world. The impact of these major changes can be traced with a matched employer-employee database that provides unusually rich information on the quality of founders and employees associated with the new firms. It turns out that the short-term consequences of the reform were just as one would predict with a standard economic model of entrepreneurship: the reform resulted in increased firm formation and employment, but mostly among "marginal firms" that would have been most readily deterred by existing heavy entry regulations. These marginal firms were typically small, owned by relatively poorly-educated entrepreneurs, and operating in the low-tech sector (agriculture, construction, and retail trade). They were also less likely to survive their first two years than comparable firms that entered prior to the reform. The social impact of entry deregulation may be limited by the quality of the firms it creates.
John Asker, New York University and NBER, and Joan Farre-Mensa and Alexander Ljungqvist, New York University
Does the Stock Market Harm Investment Incentives?
Do stock market-listed firms in the United States invest sub-optimally because of agency costs that result from separation of ownership and control? Asker, Farre-Mensa, and Ljungqvist derive testable predictions to distinguish between underinvestment attributable to rational "short-termism" and over-investment due to "empire building." Their identification strategy exploits a rich new data source on unlisted U.S. firms which are essentially agency-cost free. Listed firms invest less and are less responsive to changes in investment opportunities than observably similar unlisted firms, especially in industries in which stock prices are particularly sensitive to current profits. Listed firms also tend to smooth earnings growth and dividends and to avoid reporting losses. These patterns are consistent with short-termism and do not appear to be caused by firms endogenously choosing to be public or private: firms that go public for reasons other than to fund investment will invest like unlisted firms pre-IPO and like listed firms post-IPO. Nor do the results appear to be driven by measurement error. The evidence suggests that the stock market distorts investment, at least for the fast-growing companies in this sample.
Marc-Andreas Muendler and James E. Rauch, University of California, San Diego and NBER
Mobilizing Social Capital through Employee Spinoffs: Evidence from Brazil
One social benefit of organizing employees into firms is the creation of teams that found new firms. Muendler and Rauch model this process by extending the Jovanovic (1979) theory of job matching and employee turnover to allow employees to learn about their colleagues' qualities faster than their employers do, and to recruit them to join "spinoff" firms. The model here predicts that the hazard rate of separation from the new firm of these former colleagues who came from the "parent" firm will be lower than for workers hired from outside, but that this difference will shrink with worker tenure at the new firm. These predictions are strongly supported in Brazilian data for the period 1995-2001. Cumulatively, workers hired from the parent firm are 52 percent more likely to remain with the spinoff firm after five years than outside hires.
Annamaria Conti and Frank Rothaermel, Georgia Institute of Technology, and Marie C. Thursby, Georgia Institute of Technology and NBER
Show Me the Right Stuff: Signals for High-Tech Startups
Conti, Thursby, and Rothaermel present a model where the founders of a technology startup signal whether their technology has a high or low probability of success, using patents and founders', friends', and family's money (FFF money). These signals convey information about, respectively, the quality of the technology (and the degree of its appropriability) and the founders' commitment. The authors find that if investors care relatively more (less) about the technologies in which they invest than about the founders' commitment, then the founders will optimally invest relatively more (less) in patents than FFF money as a signal. If the investors are indifferent about the two attributes, then the ratio of investment in the corresponding signals will be inversely proportional to their relative cost. Moreover, independent of the investors' preferences, high quality startups will invest more in both signals relative to the situation of symmetric information. The authors use a novel data set, which includes information on startups located at the incubator of the Georgia Institute of Technology, to empirically test the model. They find that investment in patents is a signal for Venture Capitalists and Business Angels. However, the impact of patents on Venture Capital investment is greater than on Business Angel investment. Finally, FFF money serves as a signal for Business Angels but not for Venture Capitalists.