Presentations: Fourteenth Annual Conference on Innovation Economics, 34th Australasian Finance and Banking Conference, 2022 FIRS Finance Conference (accepted), 2022 WFA Conference (accepted)
The paper studies venture capital's role in the geographic clustering of high-growth startups. We exploit a rule change that disproportionately impacted U.S. regions that historically lacked VC financing via a restriction of banks to invest in the asset class. A one-standard-deviation increase in VCs' exposure to the rule led to an 18% decline in fund size and a 10% decrease in the likelihood of raising a follow-on fund. Startups were not wholly cushioned: financing and valuations declined. Startups also moved out of impacted states after the rule change, likely exacerbating existing geographic disparity in entrepreneurship.
Presentations: City University of Hong Kong, Singapore Management University, Southern Methodist University, the 2022 Financial Management Association Meetings in Atlanta, the 14th Annual Hedge Fund Conference in Paris, the 2023 Finance Down Under Conference in Melbourne, the 2023 Midwest Finance Association Meetings in Chicago, and the 2023 SGF Conference in Zurich
We examine the value of skilled immigrants in finance by exploiting two natural experiments. We find that hedge fund management companies that secure more H-1B visas in random lotteries deliver higher alphas, Sharpe ratios, and information ratios. Moreover, an unexpected reduction in the H-1B quota undermined the performance of hedge funds that were dependent on H-1B workers. The superior performance of funds with high H-1B visa allocations can be attributed to highly-educated, well-paid, and motivated H-1B workers with quantitative skills. H-1B workers add value by helping hedge funds overcome capacity constraints, arbitrage prominent stock anomalies, and develop distinctive investment strategies.
Presentations: The 2021 New Zealand Finance Meeting, The 2021 AFA Annual Meeting, The 2021 Greater Bay Area Finance Conference, The 2022 MFA (accepted), Renmin University of China
We examine whether VC-backed startups respond to R&D tax incentives by attempting to scale R&D activities through employment. We exploit a provision of the PATH Act of 2015, which allows qualified small businesses to offset payroll taxes with R&D tax credits, and show that marginally eligible startups increase their demand for R&D workers more than marginally ineligible startups after the PATH Act’s enactment in 2015. Marginally eligible startups not only ramp up recruiting of workers of higher quality, but also subsequently file more patents with new inventors. Our findings reveal that tax incentives can stimulate startup R&D activities through skilled labor recruitment.
Presentations: Renmin University of China, University of Wilsconsin-Milwaukee
The Qualified Small Business Stock (QSBS) exemption allows certain entrepreneurs, their employees, and their investors to sell shares of their companies without paying any—or only greatly reduced—capital gains taxes. Using a diff-in-diff identification strategy, we show that the QSBS exemption increase in 2010 led to a 12% increase in firm births in industries eligible for the exemption relative to non-eligible industries. We show that the exemption's effect on entrepreneurship is concentrated in industries that have a high rate of startup exits, in high-tech industries, and in those with a high fraction of STEM employment. The exemption also led to an increase in startup employment—but only among employees with a bachelor's or higher degree. These findings suggest that the QSBS exemption spurred entrepreneurship by increasing prospective entrepreneurs' after-tax benefit of founding a successful startup and by making it easier for them to attract highly-educated talent. In addition, we show that the QSBS exemption increased startups' ability to raise their first round of venture capital. Taken together, our findings suggest that the QSBS exemption increases both the willingness of prospective entrepreneurs to become founders and their ability to raise the resources they need to be successful. Finally, we also show that the QSBS exemption led to higher patenting in treated startups, thus suggesting that it was particularly helpful to innovative startups.
Presentations: UBS investor conference
Can retail investors on social media platforms effectively target hedge fund short positions? We show that the disclosure of hedge fund short positions drives social media activity on WallStreetBets. Social media activity in turn precipitates price increases for heavily shorted stocks. The resultant short squeezes hurt hedge funds, which respond by shorting less aggressively, leading to prolonged overpricing in the stock market. In line with a causal interpretation, the impact of social media on stock returns manifests around the publication dates for short sales, but not around the settlement dates, and attenuates during trading restrictions imposed by Robinhood.
Presentations: 2021 Five Star Workshop
We study how intellectual property (IP) protection impacts local firms' innovation incentives and patenting strategies. Exploiting the staggered establishment of specialized IP courts across Chinese regions, we show that strengthening IP protection leads to higher R&D investments but lower patenting activities. Higher litigation risk from disclosing inventions seems to dominate the benefit of stronger protections gained from patenting. Consistent with this explanation, we find that firms reduce patenting mainly in technology fields where their industry rivals have previously patented. Overall, our findings suggest that enhancing IP protection encourages more innovation efforts, possibly in uncharted technology areas.