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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]
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Abstract

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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.

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