Job Market Paper: Asymmetric Information and Capital Supply in the Venture Capital Market
I develop a competitive search model where entrepreneurs have projects with different levels of risk and have private information about their projects' quality. The combination of low capital supply and asymmetric information can cause entrepreneurs with high-quality risky projects to avoid the venture capital market. Increases in capital supply reduce the cost to entrepreneurs of attracting venture capitalists and can cause increases in the proportion of funded risky projects. Moreover, the average output per dollar of venture capital investment can increase with venture capital supply. Consistent with the model's predictions, I find that positive shocks to venture capital supply cause venture capitalists to increase their likelihood of funding companies with higher ex ante and ex post measures of risk and asymmetric information.
Non-pecuniary Benefits: Evidence from the Location of Private Company Sales
We estimate how the non-pecuniary benefits related to the quality-of-life (e.g., clement weather) of a target firm's location affect its acquisition price. Using new data on private firm acquisitions, we find that firms in cities with a higher quality-of-life sell for a 12% premium over comparable firms in cities with a lower quality-of-life. Using an instrument, we show that the premium for non-economic characteristics of a city is in addition to any premium for the orthogonal trade-production amenities (e.g., agglomeration economies and navigable waters) that affect firm fundamentals.
A Signaling Theory of Derivatives-Based Hedging
We model a commodity producing firm with private information about future volume and whose low realized cash flows cause it costly financial distress. A firm's first-best strategy is to sell forward all future production, avoiding any price risk. Low-volume firms, however, have an incentive to mimic, which in equilibrium distorts the hedging strategy of high-volume firms. Under certain conditions, high-types hedge more than their own production volume in equilibrium. Alternatively, equilibrium sometimes entails that high-types hedge less than low-types. When allowing firms to use multiple types of derivatives, we show that high-types use both options and forwards, while low-types only use forwards. The model suggests that heterogeneous and prima facie inefficient hedging policies may be due to signaling and not speculation or risk shifting.