Testimony before the Subcommittee on Financial Institutions and Consumer Credit Committee. Hearing on TARP Oversight: Is TARP Working for Main Street?
United States House of Representatives
March 4, 2009

Working Papers

Performance Persistence in Entrepreneurship with Paul Gompers, Anna Kovner and Josh Lerner, forthcoming in The Journal of Financial Economics
This paper argues that a large component of success in entrepreneurship and venture capital can be attributed to skill.  We show that entrepreneurs with a track record of success are more likely to succeed than first time entrepreneurs and those who have previously failed.  Funding by more experienced venture capital firms enhances the change of success, but only for entrepreneurs without a successful track record.  Similarly, more experienced venture capitalists are able to identify and invest in first time entrepreneurs who are more likely to become serial entrepreneurs.  Investments by venture capitalists in successful serial entrepreneurs generate higher returns for their venture capital investors.  This finding provides further support for the role of skill in both entrepreneurship and venture capital..

Evidence on the Dark Side of Internal Capital Markets with Oguzhan Ozbas, forthcoming in The Review of Financial Studies
This paper documents differences between the Q-sensitivity of investment of stand-alone firms and the unrelated segments of conglomerate firms.  Unrelated segments not only exhibit lower Q-sensitivity of investment than stand-alone firms but also invest more (less) than their stand-along counterparts in low-Q (high-Q) industries.  This finding is robust to matching on industry, size and age.  The differences are more pronounced in conglomerates in which top management has small ownership stakes, suggesting that agency problems partly explain the investment behavior of conglomerates..

Organizational Scope and Investment: Evidence from the Drug Development Strategies and Performance of Biopharmaceutical Firms with Ilan Guedj
This paper compares the clinical trial strategies and performance of large, established (“mature”) biopharmaceutical firms to those of smaller (“early stage”) firms that have not yet successfully developed a drug. We study a sample of 235 cancer drug candidates that entered clinical trials during the period 1990-2002 and were sponsored by public firms.  Early stage firms are more likely than mature firms to advance drug candidates from Phase I to Phase II clinical trials.  However, early stage firms have much less promising clinical results in their Phase II trials and their Phase II drug candidates are also less likely to advance to Phase III and to receive Food and Drug Administration approval.  This pattern is more pronounced for early stage firms with large cash reserves.  The evidence points to an agency problem between shareholders and managers of single-product early stage firms who are reluctant to abandon development of their only viable drug candidates. By contrast, the managers of mature firms with multiple products in development are more willing to drop unpromising drug candidates.  The findings appear to be consistent with the benefits of internal capital markets identified by Stein (1997).

Entrepreneurship in Equilibrium with Denis Gromb
This paper compares the financing of new ventures in start-ups (entrepreneurship) and in established firms (intrapreneurship). Intrapreneurship allows established firms to use information on failed intrapreneurs to redeploy them into other jobs. Instead, failed entrepreneurs must seek other jobs in an imperfectly informed external labor market. While this is ex-post inefficient, it provides entrepreneurs with high-powered incentives ex ante. We show that two types of equilibria can arise (and sometimes coexist). In a low (high) entrepreneurship equilibrium, the market for failed entrepreneurs is thin (deep). Internal (external) labor markets are thus particularly valuable, which favors intrapreneurship (entrepreneurship). We also show that there can be too little or too much entrepreneurial activity. There can be too much because entrepreneurs do not take into account their positive effect on the quality of the labor market. There can be too little because a high quality labor market is bad for entrepreneurial incentives.

Publications