Hostname: page-component-cd9895bd7-gbm5v Total loading time: 0 Render date: 2025-01-05T13:19:59.423Z Has data issue: false hasContentIssue false
  • English
  • Français

Is There a Trade-off Between Protecting Investors and Promoting Entrepreneurial Activity? Evidence from Angel Financing

Published online by Cambridge University Press:  17 November 2022

Jiajie Xu Open the ORCID record for Jiajie Xu [Opens in a new window]
Jiajie Xu*
Affiliation:
University of Iowa Tippie College of Business
*
[email protected]
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

This article studies how changes in investor protection regulations affect local entrepreneurial activity, relying on the heterogeneous impact of a 2011 SEC regulation change on the definition of accredited investors across U.S. cities. Using a difference-in-differences approach, I show that cities more affected by the regulation change experienced a significantly larger decrease in local angel financing, entrepreneurial activity, innovation output, employment, and sales. I find that small business loans and second-lien mortgages became entrepreneurs’ partial substitutes for angel investment. My cost-benefit analysis suggests that the costs of protecting angel investors through the 2011 regulation change outweigh its benefits.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 8 , December 2023 , pp. 3305 - 3341
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I am grateful to Scott Bauguess (the referee) and Jarrad Harford (the editor) for their valuable input. This article is based on chapter 2 of my dissertation at Carroll School of Management of Boston College. I am indebted to the guidance and support from my dissertation committee, Thomas Chemmanur (Chair), Francesco D’Acunto, Ran Duchin, Hassan Tehranian, and Xuan Tian. For helpful suggestions and comments, I thank Chang Suk Bae (discussant), Vyacheslav Fos, Rawley Heimer, Adam Jorring, Nadya Malenko, Alan Marcus, Philip Strahan, Ting Xu (discussant), seminar participants at Boston College, University of Iowa, Iowa State University, Washington State University, Tulane University, University of Delaware, University of Arizona, and conference participants at 2021 AFA PhD Student Poster Session, 2021 Midwest Finance Association Annual Meeting, 2021 Student Workshop on Entrepreneurial Finance and Innovation, and 2021 Eastern Finance Association Annual Meeting. Special thanks to Walls & Associates for providing me the access to the National Establishment Time Series (NETS) Database. I am responsible for all remaining errors and omissions.

References

Adelino, M.; Schoar, A.; and Severino, F.. “House Prices, Collateral, and Self-Employment.” Journal of Financial Economics, 117 (2015), 288–306.CrossRefGoogle Scholar
Agrawal, A. K. “The Impact of Investor Protection Law on Corporate Policy and Performance: Evidence from the Blue Sky Laws.” Journal of Financial Economics, 107 (2013), 417–435.CrossRefGoogle Scholar
Agrawal, A.; Catalini, C.; and Goldfarb, A.. “Crowdfunding: Geography, Social Networks, and the Timing of Investment Decisions.” Journal of Economics & Management Strategy, 24 (2015), 253–274.Google Scholar
Audretsch, D. B.; Link, A. N.; and Scott, J. T.. “Public/Private Technology Partnerships: Evaluating SBIR-Supported Research.” Research Policy, 31 (2002), 145–158.CrossRefGoogle Scholar
Babina, T.; He, A. X.; Howell, S.; Perlman, E.; and Staudt, J.. “Cutting the Innovation Engine: How Federal Funding Shocks Affect University Patenting, Entrepreneurship, and Publications.” Quarterly Journal of Economics, forthcoming (2023).Google Scholar
Bailey, M.; Cao, R.; Kuchler, T.; and Stroebel, J.. “The Economic Effects of Social Networks: Evidence from the Housing Market.” Journal of Political Economy, 126 (2018), 2224–2276.CrossRefGoogle Scholar
Barth, M. E.; Landsman, W. R.; and Taylor, D. J.. “The JOBS ACT and Information Uncertainty in IPO Firms.” Accounting Review, 92 (2017), 25–47.CrossRefGoogle Scholar
Bernstein, S.; Korteweg, A.; and Laws, K.. “Attracting Early-Stage Investors: Evidence from a Randomized Field Experiment.” Journal of Finance, 72 (2017), 509–538.CrossRefGoogle Scholar
Brander, J. A.; Du, Q.; and Hellmann, T.. “The Effects of Government-Sponsored Venture Capital: International Evidence.” Review of Finance, 19 (2015), 571–618.CrossRefGoogle Scholar
Brown, D. J., and Earle, J. S.. “Finance and Growth at the Firm Level: Evidence from SBA Loans.” Journal of Finance, 72 (2017), 1039–1080.CrossRefGoogle Scholar
Chaplinsky, S.; Hanley, K. W.; and Moon, S. K.. “The JOBS ACT and the Costs of Going Public.” Journal of Accounting Research, 55 (2017), 795–836.CrossRefGoogle Scholar
Chemmanur, T. J., and Chen, Z.. “Venture Capitalists Versus Angels: The Dynamics of Private Firm Financing Contracts.” Review of Corporate Finance Studies, 3 (2014), 39–86.CrossRefGoogle Scholar
Chemmanur, T. J.; Loutskina, E.; and Tian, X.. “Corporate Venture Capital, Value Creation, and Innovation.” Review of Financial Studies, 27 (2014), 2434–2473.CrossRefGoogle Scholar
Chenevert, R.; Gottschalck, A.; Klee, M.; and Zhang, X., Where the Wealth is: The Geographic Distribution of Wealth in the United States. Washington, DC: U.S. Census Bureau (2017).Google Scholar
Claessens, S.; Djankov, S.; Fan, J. P.; and Lang, L. H.. “Disentangling the Incentive and Entrenchment Effects of Large Shareholdings.” Journal of Finance, 57 (2002), 2741–2771.CrossRefGoogle Scholar
Claessens, S.; Djankov, S.; and Lang, L. H.. “The Separation of Ownership and Control in East Asian Corporations.” Journal of Financial Economics, 58 (2000), 81–112.CrossRefGoogle Scholar
Collewaert, V., and Fassin, Y.. “Conicts between Entrepreneurs and Investors: The Impact of Perceived Unethical Behavior.” Small Business Economics, 40 (2013), 635–649.CrossRefGoogle Scholar
Conti, A.; Thursby, M.; and Rothaermel, F. T.. “Show Me the Right Stuff: Signals for High-Tech Startups.” Journal of Economics & Management Strategy, 22 (2013), 341–364.Google Scholar
Corradin, S., and Popov, A.. “House Prices, Home Equity Borrowing, and Entrepreneurship.” Review of Financial Studies, 28 (2015), 2399–2428.CrossRefGoogle Scholar
Da Rin, M.; Nicodano, G.; and Sembenelli, A.. “Public Policy and the Creation of Active Venture Capital Markets.” Journal of Public Economics, 90 (2006), 1699–1723.CrossRefGoogle Scholar
Dambra, M.; Field, L. C.; and Gustafson, M. T.. “The JOBS ACT and IPO Volume: Evidence that Disclosure Costs Affect the IPO Decision.” Journal of Financial Economics, 116 (2015), 121–143.CrossRefGoogle Scholar
Denes, M. “When Do Firms Risk Shift? Evidence from Venture Capital.” Available at SSRN 2875882 (2017).CrossRefGoogle Scholar
Denes, M.; Howell, S.; Mezzanotti, F.; Wang, X.; and Xu, T.. “Investor Tax Credits and Entrepreneurship: Evidence from US States.” Available at SSRN 3596342 (2020).CrossRefGoogle Scholar
Di Maggio, M.; Kermani, A.; Keys, B. J.; Piskorski, T.; Ramcharan, R.; Seru, A.; and Yao, V.. “Interest Rate Pass-through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging.” American Economic Review, 107 (2017), 3550–3588.CrossRefGoogle Scholar
Drover, W.; Busenitz, L.; Matusik, S.; Townsend, D.; Anglin, A.; and Dushnitsky, G.. “A Review and Road Map of Entrepreneurial Equity Financing Research: Venture Capital, Corporate Venture Capital, Angel Investment, Crowdfunding, and Accelerators.” Journal of Management, 43 (2017), 1820–1853.CrossRefGoogle Scholar
Ewens, M., and Malenko, N.. “Board Dynamics Over the Startup Lifecycle.” Available at SSRN 3640898 (2020).CrossRefGoogle Scholar
Giroud, X., and Mueller, H. M.. “Firm Leverage, Consumer Demand, and Employment Losses during the Great Recession.” Quarterly Journal of Economics, 132 (2017), 271–316.CrossRefGoogle Scholar
Giroud, X., and Mueller, H. M.. “Firms’ Internal Networks and Local Economic Shocks.” American Economic Review, 109 (2019), 3617–3649.CrossRefGoogle Scholar
Grinblatt, M., and Hwang, C. Y.. “Signalling and the Pricing of New Issues.” Journal of Finance, 44 (1989), 393–420.CrossRefGoogle Scholar
Hall, B. H.; Jaffe, A. B.; and Trajtenberg, M.. “The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools.” NBER Working Paper No. 8498 (2001).CrossRefGoogle Scholar
Hall, B. H., and Lerner, J.. “The Financing of R&D and Innovation.” In Handbook of the Economics of Innovation, Vol. 1. North-Holland, Netherlands: Elsevier (2010), 609–639.CrossRefGoogle Scholar
Hellmann, T., and Puri, M.. “Venture Capital and the Professionalization of Start-up Firms: Empirical Evidence.” Journal of Finance, 57 (2002), 169–197.CrossRefGoogle Scholar
Hellmann, T.; Schure, P.; and Vo, D. H.. “Angels and Venture Capitalists: Substitutes or Complements?” Journal of Financial Economics, 141 (2021), 454–478.CrossRefGoogle Scholar
Hellmann, T., and Thiele, V.. “Friends or Foes? The Interrelationship between Angel and Venture Capital Markets.” Journal of Financial Economics, 115 (2015), 639–653.CrossRefGoogle Scholar
Hombert, J.; Schoar, A.; Sraer, D.; and Thesmar, D.. “Can Unemployment Insurance Spur Entrepreneurial Activity? Evidence from France.” Journal of Finance, 75 (2020), 1247–1285.CrossRefGoogle Scholar
Howell, S. T. “Financing Innovation: Evidence from R&D Grants.” American Economic Review, 107 (2017), 1136–1164.CrossRefGoogle Scholar
Huang, L.; Wu, A.; Lee, M. J.; Bao, J.; Hudson, M.; and Bolle, E.. “The American Angel.” Washington, DC: Angel Capital Association (2017).Google Scholar
Hudson, M. “Angel Investors, Innovative Startups and the Accredited Investor Definition. SEC Advisory Committee on Small and Emerging Companies.” (2014). Retrieved from https://www.angelcapitalassociation.org/data/Documents/Press%20Center/SECSmallBizCommitteeACA12-17-14Final.pdf?rev=B13D.Google Scholar
Ivanov, V., and Bauguess, S.. “Capital Raising in the US: An Analysis of Unregistered Offerings Using the Regulation D Exemption, 2009–2012.” U.S. Securities and Exchange Commission White Paper (2013).CrossRefGoogle Scholar
Kaplan, G.; Mitman, K.; and Violante, G. L.. “Non-Durable Consumption and Housing Net Worth in the Great Recession: Evidence from Easily Accessible Data.” Journal of Public Economics, 189 (2020), 104176.CrossRefGoogle Scholar
Kerr, S. P.; Kerr, W.; and Nanda, R.. “House Money and Entrepreneurship.” NBER Working Paper No. 21458 (2015).CrossRefGoogle Scholar
Kerr, W. R.; Lerner, J.; and Schoar, A.. “The Consequences of Entrepreneurial Finance: Evidence from Angel Financings.” Review of Financial Studies, 27 (2014), 20–55.CrossRefGoogle Scholar
La Porta, R.; Lopez-de Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Legal Determinants of External Finance.” Journal of Finance, 52 (1997), 1131–1150.CrossRefGoogle Scholar
La Porta, R.; Lopez-de Silanes, F.; Shleifer, A.; and Vishny, R.. “Investor Protection and Corporate Governance.” Journal of Financial Economics, 58 (2000), 3–27.CrossRefGoogle Scholar
La Porta, R.; Lopez-de Silanes, F.; Shleifer, A.; and Vishny, R.. “Investor Protection and Corporate Valuation.” Journal of Finance, 57 (2002), 1147–1170.CrossRefGoogle Scholar
Lee, A. H., and Crenshaw, C.. “Joint Statement on the Failure to Modernize the Accredited Investor Definition.” Retrieved from https://www.sec.gov/news/public-statement/lee-crenshaw-accredited-investor-2020-08-26 (2020).Google Scholar
Leland, H. E., and Pyle, D. H.. “Informational Asymmetries, Financial Structure, and Financial Intermediation.” Journal of Finance, 32 (1977), 371–387.CrossRefGoogle Scholar
Lerner, J. “The Government as Venture Capitalist: The Long-Run Impact of the SBIR Program.” Journal of Private Equity, 3 (2000), 55–78.CrossRefGoogle Scholar
Lerner, J.; Schoar, A.; Sokolinski, S.; and Wilson, K.. “The Globalization of Angel Investments: Evidence Across Countries.” Journal of Financial Economics, 127 (2018), 1–20.CrossRefGoogle Scholar
Lindsey, L. A., & Stein, L. C.. “Angels, Entrepreneurship, and Employment Dynamics: Evidence from Investor Accreditation Rules.” Available at SSRN 2939994 (2020).Google Scholar
Mian, A.; Suff, A.; and Trebbi, F.. “Foreclosures, House Prices, and the Real Economy.” Journal of Finance, 70 (2015), 2587–634.CrossRefGoogle Scholar
Michelacci, C., and Silva, O.. “Why So Many Local Entrepreneurs?” Review of Economics and Statistics, 89 (2007), 615–633.CrossRefGoogle Scholar
Myers, S. C. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–175.CrossRefGoogle Scholar
Ozmel, U.; Robinson, D. T.; and Stuart, T. E.. “Strategic Alliances, Venture Capital, and Exit Decisions in Early Stage High-Tech Firms.” Journal of Financial Economics, 107 (2013), 655–670.CrossRefGoogle Scholar
Rubinstein, A., and Wolinsky, A.. “Middlemen.” Quarterly Journal of Economics, 102 (1987), 581–593.CrossRefGoogle Scholar
Schmalz, M. C.; Sraer, D. A.; and Thesmar, D.. “Housing Collateral and Entrepreneurship.” Journal of Finance, 72 (2017), 99–132.CrossRefGoogle Scholar
Schwienbacher, A. “A Theoretical Analysis of Optimal Financing Strategies for Different Types of Capital-Constrained Entrepreneurs.” Journal of Business Venturing, 22 (2007), 753–781.CrossRefGoogle Scholar
Shane, S. Fool’s Gold?: The Truth behind Angel Investing in AMERICA. New York, NY: Oxford University Press (2008).CrossRefGoogle Scholar
Shleifer, A., and Wolfenzon, D.. “Investor Protection and Equity Markets.” Journal of Financial Economics, 66 (2002), 3–27.CrossRefGoogle Scholar
Stuart, T. E., and Sorenson, O.. “Social Networks and Entrepreneurship.” In Handbook of Entrepreneurship Research. Alvarez, S. A., Agarwal, R., and Sorenson, O., eds. New York, NY: Springer (2005), 233–252.CrossRefGoogle Scholar
Tian, X., and Wang, T. Y.. “Tolerance for Failure and Corporate Innovation.” Review of Financial Studies, 27 (2014), 211–255.CrossRefGoogle Scholar
Tian, X., and Xu, J.. “Do Place-Based Policies Promote Local Innovation and Entrepreneurship?” Review of Finance, 26 (2022), 595–635.CrossRefGoogle Scholar
Venugopal, B., and Yerramilli, V.. “Seed-Stage Success and Growth of Angel Co-Investment Networks.” Review of Corporate Finance Studies, 11 (2022), 169–210.CrossRefGoogle Scholar
Wang, X. “Catering Innovation: Entrepreneurship and the Acquisition Market.” Working Paper, UCLA Anderson School of Management (2018).CrossRefGoogle Scholar
Wiltbank, R., and Boeker, W.. “Returns to Angel Investors in Groups.” Available at SSRN 1028592 (2007).CrossRefGoogle Scholar
Winton, A., and Yerramilli, V.. “Entrepreneurial Finance: Banks Versus Venture Capital.” Journal of Financial Economics, 88 (2008), 51–79.CrossRefGoogle Scholar
Xu, T. “Learning from the Crowd: The Feedback Value of Crowdfunding.” Available at SSRN 2637699 (2018).Google Scholar
Yu, S. “How Do Accelerators Impact the Performance of High-Technology Ventures?” Management Science, 66 (2020), 530–552.CrossRefGoogle Scholar
Supplementary material: PDF

Xu supplementary material

Xu supplementary material

Download Xu supplementary material(PDF)
PDF 1.7 MB