Investor Horizon and Innovation: Evidence from Private Equity Funds

Abstract:     
Investments exploring new ideas typically take more time to payo than investments exploiting existing ones. Hence, investor with a short term horizon might be tilted towards the latter. I test this idea in the context of private equity funds, which generally have a limited investment horizon contractually ex ante. I use between and within fund variations in investment horizon to do so. I show that funds with a longer horizon select younger companies at an earlier stage of their development, stage investment more and hold on to their investments for a longer period of time. Moreover, companies which receive funding from funds with a longer horizon increase their patent stock signicantly more than companies which receive funding from short horizon investors. Altogether, these results provide new evidence on the behavior of private equity funds throughout their life cycle and suggest that investor horizon matters to an important extent for the funding of corporate innovation.

Number of Pages in PDF File: 50

Keywords: private equity, venture capital, compensation, investor horizon

JEL Classification: G24

working papers series