Abstract not found

We review the theory and evidence on IPO activity: why firms go public, why they reward first-day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective is threefold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena.

Recent research studying the link between law and finance has concentrated on countrylevel investor protection measures and focused on differences in legal systems across countries and legal families. Our paper extends this literature and provides a study of firmlevel corporate governance practices across emerging markets and a greater understanding of the environments under which corporate governance matters more. Our empirical tests show that better corporate governance is highly correlated with better operating performance and market valuation. More importantly, we provide evidence showing that firm- level corporate governance provisions matter more in countries with weak legal environments. These results suggest that well- governed firms benefit more in bad corporate governance environments and that firms can partially compensate for ineffective laws and enforcement by establishing good corporate governance and providing credible investor protection. Our tests also show that firm- level governance and performance is lower in countries with weak legal environments, suggesting that improving the legal system should rema in a priority for policymakers. 1.

Powell and K.W. Koput, Co-PIs). We appreciate the helpful comments of Gernot

This paper examines how a country's financial structure affects economic growth through its impact on how corporations raise and manage funds. We define a country's financial structure to consist of the institutions, financial technology, and rules of the game that define how financial activity is organized at a point in time. We emphasize that the aspects of financial structure that encourage entrepreneurship are not the same as those that insure the efficiency of established firms. Financial structures that permit the development of specialized capital by financial intermediaries are crucial to economic growth.

In the last two decades the European financial markets have become more market oriented. We analyze the economic and political forces that have triggered these changes as well as their likely welfare implications. We also try to assess whether this trend will continue. Based on our analysis, we conjecture that even if Europe might benefit from a continuation of the trend, in the near future political support for it is likely to become much weaker. Furthermore, without serious reforms, the trend is likely to benefit Southern Europe less than Northern Europe. *Prepared for the 2 nd ECB Central Banking Conference. We thank Franklin Allen, Philip Hartmann, Rafael Repullo and Martin Hellwig for useful comments and Fang Yu for his help in collecting the data, the Center for Research in Security Prices and the Stigler Center at the University of Chicago for financial support. In the last two decades Europe has experienced a dramatic expansion of financial markets, especially of arm’s length financial markets. But what are the underlying causes of these changes? Are these causes likely to subside in the next few years? Most importantly, will additional movements in this direction be beneficial to the economies of all the E.U. countries? These are the issues we address in this paper.

The importance of the investor’s organizational structure is increasingly recognized in modern finance. This paper examines the role of banks in the US venture capital market. Theory suggests that unlike independent venture capital firms, banks can seek complementarities between their venture capital and lending activities. We find no evidence that banks transfer origination or screening skills from their lending to their venture capital activities. However, our analysis suggests that banks use venture capital relationships to bolster their lending activities. Banks target their venture investments to companies that are more likely to subsequently raise loans. Having made an investment as a venture capitalist increases a bank’s likelihood of providing a loan. Companies may benefit from these relationships through more favorable loan pricing. The analysis suggests that banks are strategic investors in the venture capital market, and provides a cautionary note for relying on banks for the development of a venture capital industry. 1

This paper presents a synthetic framework identifying the central drivers of start-up commercialization strategy and the implications of these drivers for industrial dynamics. We link strategy to the commercialization environment – the microeconomic and strategic conditions facing a firm that is translating an “idea ” into a value proposition for customers. The framework addresses why technology entrepreneurs in some environments undermine established firms, while others cooperate with incumbents and reinforce existing market power. Our analysis suggests that competitive interaction between start-up innovators and established firms depends on the presence or absence of a “market for ideas. ” By focusing on the operating requirements, efficiency, and institutions associated with markets for ideas, this framework holds several implications for the management of high-technology entrepreneurial firms.

This paper provides a new explanation for the use of convertible preferred equity in venture capital. It explains that the key feature of the convertible security is to create different cash flow rights for acquisitions and IPOs. It shows how the convertible security implements an optimal trade-off between the need to allocate cash flows to the venture capitalist and the desire to make efficient exit decisions. This approach also explains some puzzling contract features, such as automatic conversion in case of an IPO, or the use of participating preferred equity, where conversion never benefits the investors.

Venture capital ¯nancing is characterized by extensive use of convertible securities and stage ¯nancing. In a model where an entrepreneur obtains funding for a project from a venture capitalist, we illustrate an advantage of convertible debt over a mixture of debt and equity in stage ¯nancing situations. Essentially, when the venture capitalist retains the option to abandon the project, the entrepreneur has an incentive to engage in window dressing and bias positively the short-term performance of the project, reducing the probability that it will be liquidated. An appropriately designed convertible debt contract prevents such short-termistic behavior since window dressing also increases the probability that the venture capitalist will convert debt into equity.