Investment, duration, and exit strategies for corporate and independent venture capital-backed start-ups

We propose a model of investment, duration, and exit strategies for start-ups backed by venture capital (VC) funds that accounts for the high level of uncertainty, the asymmetry of information between insiders and outsiders, and the discount rate. Our analysis predicts that start-ups backed by corporate VC funds remain for a longer period of time before exiting and receive larger investment amounts than those financed by independent VC funds. Although a longer duration leads to a higher likelihood of an exit through an acquisition, a larger investment increases the probability of an IPO exit. These predictions find strong empirical support.

Capital cities of federations. On the way to analysing the normative base of their asymmetrical status

Federal Capitals often have special statutes. Compared with member states, they often enjoy a lower degree of self-government and a lesser share in the governing of the federation. Why do actors choose such devices, and how can they be justified in a liberal democracy? Surprisingly, the burgeoning literature on asymmetric federalism (to which our research group has contributed significantly) has overlooked this important feature of a de iure asymmetry, perhaps because political theory up to now has concentrated on cases of multicultural and plurinational federations. However, comparative literature is also rare. This paper is the first step to filling in this gap by comparing some federal capitals. The Federal District model (Washington) is compared to capitals organized as member-states (Berlin and Brussels), and capitals that are cities belonging to a single member state (Ottawa in Ontario). The different features of de iure asymmetry will thereby be highlighted. Some light will be shed on the possible motives, reasons and justifications for the choice of each respective status. The paper opens the door to further research on such status questions by analysing public and parliamentary debates, for example. It paves the way for more thorough research. Sicne the author has been awarded a grant by the Institut d’Estudis Autonòmics, this research will be carried out soon.

Human Capital, the Structure of Production, and Growth

Recent decisions by the Spanish national competition authority (TDC) mandate payment systems to include only two costs when setting their domestic multilateral interchange fees (MIF): a fixed processing cost and a variable cost for the risk of fraud. This artificial lowering of MIFs will not lower consumer prices, because of uncompetitive retailing; but it will however lead to higher cardholders fees and, likely, new prices for point of sale terminals, delaying the development of the immature Spanish card market. Also, to the extent that increased cardholders fees do not offset the fall in MIFs revenue, the task of issuing new cards will be underpaid relatively to the task of acquiring new merchants, causing an imbalance between the two sides of the networks. Moreover, the pricing scheme arising from the decisions will cause unbundling and underprovision of those services whose costs are excluded. Indeed, the payment guarantee and the free funding period will tend to be removed from the package of services currently provided, to be either provided by third parties, by issuers for a separate fee, or not provided at all, especially to smaller and medium-sized merchants. Transaction services will also suffer the consequences that the TDC precludes pricing them in variable terms.

Equities and inequality

Most US credit card holders revolve high-interest debt, often combined with substantial (i) asset accumulation by retirement, and (ii) low-rate liquid assets. Hyperbolic discounting can resolve only the former puzzle (Laibson et al., 2003). Bertaut and Haliassos (2002) proposed an 'accountant-shopper'framework for the latter. The current paper builds, solves, and simulates a fully-specified accountant-shopper model, to show that this framework canactually generate both types of co-existence, as well as target credit card utilization rates consistent with Gross and Souleles (2002). The benchmark model is compared to setups without self-control problems, with alternative mechanisms, and with impatient but fully rational shoppers.

Intellectual property rights and efficient firm organization

I show that intellectual property rights yield static efficiency gains, irrespective oftheir dynamic role in fostering innovation. I develop a property-rights model of firmorganization with two dimensions of non-contractible investment. In equilibrium, thefirst best is attained if and only if ownership of tangible and intangible assets is equallyprotected. If IP rights are weaker, firm structure is distorted and efficiency declines:the entrepreneur must either integrate her suppliers, which prompts a decline in theirinvestment; or else risk their defection, which entails a waste of her human capital. Mymodel predicts greater prevalence of vertical integration where IP rights are weaker,and a switch from integration to outsourcing over the product cycle. Both empiricalpredictions are consistent with evidence on multinational companies. As a normativeimplication, I find that IP rights should be strong but narrowly defined, to protect abusiness without holding up its potential spin-offs.

Social capital, government expenditures, and growth

Countries with greater social capital have higher economic growth. We show that socialcapital is also highly positively correlated across countries with government expenditureon education. We develop an infinite-horizon model of public spending and endogenousstochastic growth that explains both facts through frictions in political agency whenvoters have imperfect information. In our model, the government provides servicesthat yield immediate utility, and investment that raises future productivity. Voters aremore likely to observe public services, so politicians have electoral incentives to underprovidepublic investment. Social capital increases voters' awareness of all governmentactivity. As a consequence, both politicians' incentives and their selection improve.In the dynamic equilibrium, both the amount and the efficiency of public investmentincrease, permanently raising the growth rate.

A model of shadow banking

We present a model of shadow banking in which financial intermediaries originate and trade loans, assemble these loans into diversified portfolios, and then finance these portfolios externally with riskless debt. In this model: i) outside investor wealth drives the demand for riskless debt and indirectly for securitization, ii) intermediary assets and leverage move together as in Adrian and Shin (2010), and iii) intermediaries increase their exposure to systematic risk as they reduce their idiosyncratic risk through diversification, as in Acharya, Schnabl, and Suarez (2010). Under rational expectations, the shadow banking system is stable and improves welfare. When investors and intermediaries neglect tail risks, however, the expansion of risky lending and the concentration of risks in the intermediaries create financial fragility and fluctuations in liquidity over time.

Human capital and regional development

We investigate the determinants of regional development using a newly constructed database of 1569 sub-national regions from 110 countries covering 74 percent of the world s surface and 97 percent of its GDP. We combine the cross-regional analysis of geographic, institutional, cultural, and human capital determinants of regional development with an examination of productivity in several thousand establishments located in these regions. To organize the discussion, we present a new model of regional development that introduces into a standard migration framework elements of both the Lucas (1978) model of the allocation of talent between entrepreneurship and work, and the Lucas (1988) model of human capital externalities. The evidence points to the paramount importance of human capital in accounting for regional differences in development, but also suggests from model estimation and calibration that entrepreneurial inputs and possibly human capital externalities help understand the data.

On the term structure of Interbank interest rates: Jump-diffusion processes and option pricing

In this paper we study the dynamic behavior of the term structureof Interbank interest rates and the pricing of options on interest ratesensitive securities. We posit a generalized single factor model withjumps to take into account external influences in the market. Daily datais used to test for jump effects. Qualitative examination of the linkagebetween Monetary Authorities' interventions and jumps are studied. Pricingresults suggests a systematic underpricing in bonds and call options ifthe jumps component is not included. However, the pricing of put optionson bonds presents indeterminacies.

Option pricing under stochastic volatility and stochastic interest rate in the Spanish case

Among the underlying assumptions of the Black-Scholes option pricingmodel, those of a fixed volatility of the underlying asset and of aconstantshort-term riskless interest rate, cause the largest empirical biases. Onlyrecently has attention been paid to the simultaneous effects of thestochasticnature of both variables on the pricing of options. This paper has tried toestimate the effects of a stochastic volatility and a stochastic interestrate inthe Spanish option market. A discrete approach was used. Symmetricand asymmetricGARCH models were tried. The presence of in-the-mean and seasonalityeffectswas allowed. The stochastic processes of the MIBOR90, a Spanishshort-terminterest rate, from March 19, 1990 to May 31, 1994 and of the volatilityofthe returns of the most important Spanish stock index (IBEX-35) fromOctober1, 1987 to January 20, 1994, were estimated. These estimators wereused onpricing Call options on the stock index, from November 30, 1993 to May30, 1994.Hull-White and Amin-Ng pricing formulas were used. These prices werecomparedwith actual prices and with those derived from the Black-Scholesformula,trying to detect the biases reported previously in the literature. Whereasthe conditional variance of the MIBOR90 interest rate seemed to be freeofARCH effects, an asymmetric GARCH with in-the-mean and seasonalityeffectsand some evidence of persistence in variance (IEGARCH(1,2)-M-S) wasfoundto be the model that best represent the behavior of the stochasticvolatilityof the IBEX-35 stock returns. All the biases reported previously in theliterature were found. All the formulas overpriced the options inNear-the-Moneycase and underpriced the options otherwise. Furthermore, in most optiontrading, Black-Scholes overpriced the options and, because of thetime-to-maturityeffect, implied volatility computed from the Black-Scholes formula,underestimatedthe actual volatility.

Technical inefficiency and public capital in US States: A stochastic frontier approach

This paper estimates a translog stochastic frontier production function in the analysis of all 48 contiguous U.S. states in the period 1970-1983, to attempt to measure and explain changes in technical efficiency. The model allows technical inefficiency to vary over time, and inefficiency effects to be a function of a set of explanatory variables in which the level and composition of public capital plays an important role. Results indicated that U.S. state inefficiency levels were significantly and positively correlated with the ratio of public capital to private capital. The proportion of public capital devoted to highways is negatively correlated with technical inefficiency, suggesting that not only the level but also the composition of public capital influenced state efficiency.

Optimal regulation of a fully insured deposit banking system

We analyze risk sensitive incentive compatible deposit insurancein the presence of private information when the market value of depositinsurance can be determined using Merton's (1997) formula. We show that,under the assumption that transferring funds from taxpayers to financialinstitutions has a social cost, the optimal regulation combines differentlevels of capital requirements combined with decreasing premia on depositinsurance. On the other hand, it is never efficient to require the banksto hold riskless assets, so that narrow banking is not efficient. Finally,chartering banks is necessary in order to decrease the cost of asymmetricinformation.

The role of interbank markets in monetary policy: A model with rationing

This paper analyses the impact of asymmetric information in the interbankmarket and establishes its crucial role in the microfoundations of the monetarypolicy transmission mechanism. We show that interbank market imperfectionsinduce an equilibrium with rationing in the credit market. This has two majorimplications: first, it reconciles the irresponsiveness of business investment to theuser cost of capital with the large impact of monetary policy (magnitude effect)and, second, it shows that banks liquidity positions condition their reaction tomonetary policy (Kashyap and Stein liquidity effect).

Reporting intellectual capital in Spain

This study reports on the analysis of annual reports from 14- listed companies in Spainover a five-year period, from 1998 to 2002. Companies in the sample are selected on thebasis of their knowledge-based assets and incentives to report on Intellectual Capital.The empirical analysis is twofold:1) Firstly, we analyse the value of intellectual capital using a value-based approach,through the difference between market and book value over the period considered. Results show that there is a general decrease in the 'hidden value' of these companies, probably due to the general trend in stock markets.2) Secondly, we carry out a content-based analysis of the complete annual reports of the companies over the five year period. Preliminary findings seem to suggest that although the level of disclosure has increased over time, this is mainly in the form of narrative. Overall, the level of disclosure of intellectual capital remains low.

Testing financing constraints on firm investment using variable capital

We consider a dynamic multifactor model of investment with financing imperfections,adjustment costs and fixed and variable capital. We use the model to derive a test offinancing constraints based on a reduced form variable capital equation. Simulation resultsshow that this test correctly identifies financially constrained firms even when the estimationof firms investment opportunities is very noisy. In addition, the test is well specified inthe presence of both concave and convex adjustment costs of fixed capital. We confirmempirically the validity of this test on a sample of small Italian manufacturing companies.