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Abstract:
This paper empirically analyzes the impact of hedge fund regulation on fund structure and performance. The data indicate restrictions on the location of key service providers and permissible distributions via wrappers are associated with lower fund alphas, lower average monthly returns, and higher fixed fees. Further, restrictions on the location of key service providers are associated with lower manipulation-proof performance measures, while wrapper distributions are associated with lower performance fees. As well, the data show standard deviations of monthly returns are lower among jurisdictions with restrictions on the location of key service providers and higher minimum capitalization requirements.

Hedge Funds, Regulation, Law and Finance

Abstract:
This paper introduces a cross-country law and finance analysis of the regulatory impact on the level of capital flows and the sensitivity of capital flows in response to prior performance (that is, the ‘flow-performance’ relationship) in the hedge fund industry. The data indicate that distribution channels in the form of wrappers (securities that combine different products) mitigate flow-performance sensitivity. Distribution channels via investment managers and fund distribution companies enhance flow-performance sensitivity. Funds registered in countries which have larger minimum capitalization requirements have higher levels of capital flows. Funds registered in countries which restrict the location of key service providers have lower levels of capital flows. Further, offshore fund flows and calendar effects evidenced in the data are consistent with tax factors influencing capital flows. The findings are robust to selection effects for offshore registrants, among other robustness checks.

Flow, Performance, Hedge Funds, Regulation, Law and Finance

Abstract:
This paper introduces a cross-country law and finance analysis of the flow-performance relationship for hedge funds. The data indicate that distribution channels in the form of private placements and wrappers mitigate the impact of performance on fund flows. Distribution channels via investment managers and fund distribution companies enhance the impact of performance on fund flows. Funds registered in countries which have larger minimum capitalization requirements for funds have higher levels of capital flows. Funds registered in countries which restrict the location of key service providers have lower levels of capital flows. Further, offshore fund flows and calendar effects evidenced in the data are consistent with tax factors influencing fund flows. Our findings are robust to Heckman-selection effects for offshore registrants, among other robustness checks.

Flow, Performance, Hedge Funds, Regulation, Law and Finance

Abstract:
This paper introduces a cross-country law and finance analysis of the misreporting of returns in the hedge fund industry. We find strong evidence that differences in hedge fund regulation significantly affects the propensity of fund managers to misreport monthly returns. Returns are less likely to be misreported among jurisdictions that permit distributions via investment managers, which reflects active external monitoring of reported returns. By contrast, monthly returns are more likely to be misreported among jurisdictions which permit distribution channels via wrappers, banks and private placements, as well as among jurisdictions which have higher minimum capitalization requirements, and jurisdictions that restrict the location of key service providers. Further, the data indicate fund managers that operate more than one fund are more likely to misreport returns. The findings are robust to selection effects and various other robustness checks. We show misreporting significantly affects capital allocation, and calculate the wealth transfer effects of misreporting and relate this wealth transfer to differences in hedge fund regulation.

Hedge Funds, Regulation, Misreported Returns, Law and Finance

Abstract:
This paper examines the effect of fund size on investee firm valuations in the venture capital market. We show a convex relationship between fund size and firm valuations. We further document firm valuations are positively correlated to measures of limited attention such as fund size per partner and excess fund size per partner. In addition, we show ventures offered higher valuations do not reward their investors with higher exit returns. Our findings hold across a wide range of robustness checks, including but not limited to sample selection and correction for unobserved company-level value drivers. Our findings support the notion that there is diseconomy of scale in the venture capital industry, which is partially due to the constraints from the quality and quantity of human capital when fund size grows.

Limited Attention, Venture Capital, Fund Size, Equity Valuation

Abstract:
This paper examines local bias in the context of venture capital (VC) investments. Based on a sample of US VC investments between 1980 and June 2009, we find more reputable VCs (older, larger, more experienced, and with stronger IPO track record) and VCs with broader networks exhibit less local bias. Staging and specialization in technology industries increase VCs’ local bias. We also find that the VC exhibits stronger local bias when it acts as the lead VC and when it is investing alone. Finally, we show that distance matters for the eventual performance of VC investments.

home bias, venture capital

Abstract:
This paper examines local bias in the context of venture capital (VC) investments. Based on a sample of US VC investments between 1980 and June 2009, we find more reputable VCs (older, larger, more experienced, and with stronger IPO track record) and VCs with broader networks exhibit less local bias. Staging and preference for technology ventures increases VCs’ local bias. We also find that the VC exhibits stronger local bias when it acts as the lead VC and when it is investing alone. Finally, we show that distance matters for the eventual performance of VC investments.

Home bias, private equity

Abstract:
The article provides an overview of the emerging PIPE market and existing academic research in this area. I start with an introduction of the PIPE market, such as the definition of PIPE, security structure, and commonly used contract terms. Then I review existing papers examining the cost of PIPEs, returns to PIPE investors, and the role of placement agents in the offering. I also discuss recent SEC enforcement on hedge funds who involved in some PIPE transactions. Finally, I analyze how the current financial crisis has impacted the PIPE market and where this market is heading for.

Private Investment in Public Equity

Abstract:
We investigate the market structure and the pricing by placement agents of private investments in public equities (PIPEs). Our findings indicate that more reputable agents are associated with larger offers and with firms possessing lower risk. Agent reputation is positively associated with lower discounts and an enhanced post-PIPE trading environment. Issuers pay a higher dollar fee for these benefits, although more reputable agents charge a lower percentage fee. The evidence suggests that it is the quality of the issuing firm, and the pricing and reputational concern of the placement agent that drives the equilibrium in the PIPE market.

Investment bank, private investment in public equity (PIPE)

Abstract:
We examine the firm's choice between an SEO and a PIPE, an innovation in follow-on equity selling mechanism seen in the late 1990s. Our primary finding indicates that the rapid rise of the PIPE market fills the capital needs of firms which may not have access to more traditional alternatives. This lack of access is driven mainly by information asymmetry and weak operating performance. We also show that firms are more likely to choose PIPEs when the general market and the firm's stock are performing poorly. Furthermore, we find that selected firms with access to the public market may prefer a PIPE due to specific cost considerations.

Private investment in public equity (PIPE), seasoned equity offering (SEO)

Abstract:
I examine the emerging phenomenon of PIPEs (private investments in public equity) invested by venture capital funds (VCs) and hedge funds (HFs) and analyze whether and how these investors add value to firms by comparing a sample of 113 VC-invested PIPEs to a sample of 397 PIPEs with HFs. I find that VCs gain substantial ownership, request board seats, and often keep their stake after the PIPEs. In contrast, HFs rarely join the board of directors and typically cash out their positions shortly after the PIPE. The stock performance of VC-invested firms is significantly better than HF-invested firms both in the short run and in the long run. The positive valuation effect of having VCs as PIPE investors appears to be a certification effect rather than a monitoring effect. A key implication from these findings is that investor identity matters.

Private investment in public equity, venture capital, hedge fund

Abstract:
We examine the dynamics of the positive sorting in the venture capital (VC) industry by analyzing how the relationship between VCs and entrepreneurial firms evolves as new information regarding the potential of the company is learned. We empirically show that higher-quality companies previously associated with less reputable VCs are more likely to switch to more reputable ones and obtain higher pre-money valuation but smaller investment size in follow-on rounds. On the contrary, lower-quality companies are more likely to switch to less reputable VCs while none of the existing VCs continue investing in them. This group of companies obtain larger investment size but lower pre-money valuation in follow-on rounds. Furthermore, on average, it takes more time for switchers to obtain follow-on financing than non-switchers, which is most significant for those low-quality switchers.

Venture Capital, Switching

Abstract:
Does entrepreneurial optimism affect the financing decisions of small firms? Using a large sample of U.S. small businesses and an innovative measure of optimism, we find that higher levels of optimism result in significantly higher leverage. This effect is independent of the effects of the traditional non-behavioral models of capital structure. In addition, we find that firms with optimistic entrepreneurs tend to use more short-term debt.

entrepreneurial optimism, capital structure, small businesses