The Pecking Order of Innovation Finance

with Andrea Mina; available at SSRN.

Abstract: This paper examines the relationship between firms’ innovation activities and the hierarchy of financing behaviours. We analyse the role of innovation inputs (R&D), intermediate outputs (patents) and outcomes (product and process innovations) as sources of information asymmetry in financing decisions. Our focus on mainly unlisted companies allows us to study the effects of information asymmetries in the context where they are most severe, that is, among small and medium sized firms. We identify the effect of innovation, alongside the size of the firm, its age and its human capital, on the order of directly observed external capital allocations. Our results show that innovation is negatively associated with the standard pecking order of increasing agency costs, and that the more uncertain the innovation signal, the stronger its effect on the pecking order.

Inflating away your pension

As a result of their negotitations on the future of UK university pensions, which I have written about previously, the University and College Union (UCU) and employers represented by Universities UK (UUK) announced an agreement on 12 March 2018. The main points of the agreement are:

  • Change the accrual rate from 1/75 to 1/85 per year of service
  • Increase employee contributions from 8% to 8.7%
  • Cap the increases of accrued pensions at CPI up to 2.5% p.a.

While the effect of the first two changes on the value of future pensions is relatively straightforward to analyse, the effect of the inflation cap is not obvious. In the first attempt to model the effect of this proposal that I am aware of, Richard Wilkinson finds a substantial real-terms loss to pensions if inflation history exactly repeats the last 40 years. The figure below shows the annual inflation rate since 1976, the year after the University Superannuation Scheme (USS) was founded, and the proposed inflation cap at 2.5%. Continue reading

Early Indicators of Fundraising Success by Venture Capital Firms

with Timothy E. Trombley

This working paper is available at SSRN.

Abstract: We show how a venture capital firm’s fundraising is affected by its investment choices. We investigate three leading indicators that are calculated from the type of investments the venture capital firms make: style drift investments, follow-on investments, and investments in which the venture capital firm is not the lead investor in the portfolio company. We find that these investments are associated with lower fundraising. Investment type and fundraising reaction to investment type are both moderately stable through time. We also find evidence that information about investment types is more important for fundraising during bad states of the world.

Takeover law to protect shareholders: Increasing efficiency or merely redistributing gains?

Journal of Corporate Finance, Volume 43, 2017, Pages 288–315. Accepted manuscript available here.

with Ying Wang

Abstract: We construct a dynamic takeover law index using hand-collected data on legal provisions and empirically examine the effect of takeover regulation to protect shareholders on shareholder wealth for bidders and targets in a multi-country setting. We find that a stricter takeover law increases the wealth gains to the shareholders of the combined bidder and target firm, which suggests that stronger shareholder protection in the takeover bid process increases the efficiency of the takeover market. In contrast to our hypothesis, results show that stricter takeover law does not hurt bidders. Its effect on target announcement returns is significantly positive and economically large. Our findings on individual provisions suggest that the mandatory bid rule and ownership disclosure increase overall synergistic gains in takeovers, whilst the fair-price rule and squeeze-out rights may reduce them. Further results show that stricter takeover regulation increases competition in the market for corporate control and reduces the time to successful completion of a takeover bid, which explains increased combined wealth gains under stricter takeover regulation.


The calculation of index values in Table 3 (‘Takeover law index for European countries, 1986–2010’) contains an error. The correct table can be downloaded here (Excel version here).

Venture capital investments and the technological performance of portfolio firms

Research Policy, Volume 45, Issue 1, February 2016, Pages 303–318 (Open Access)

with Andrea Mina

Abstract: What is the relationship between venture capitalists’ selection of investment targets and the effects of these investments on the patenting performance of portfolio companies? In this paper, we set out a modelling and estimation framework designed to discover whether venture capital (VC) increases the patenting performance of firms or whether this effect is a consequence of prior investment selection based on firms’ patent output. We develop simultaneous models predicting the likelihood that firms attract VC financing, the likelihood that they patent, and the number of patents applied for and granted. Fully accounting for the endogeneity of investment, we find that the effect of VC on patenting is insignificant or negative, in contrast to the results generated by simpler models with independent equations. Our findings show that venture capitalists follow patent signals to invest in companies with commercially viable know-how and suggest that they are more likely to rationalise, rather than increase, the patenting output of portfolio firms.