How Does Human Capital Matter? Evidence from Venture Capital

43 Pages Posted: 30 Oct 2017  

Lifeng Gu

The University of Hong Kong

Ruidi Huang

University of Illinois at Urbana-Champaign - Department of Finance

Yifei Mao

Cornell University - SC Johnson College of Business - Finance Department

Xuan Tian

Tsinghua University - PBC School of Finance

Date Written: October 27, 2017

Abstract

We investigate the effects of human capital mobility on venture capital (VC) investment and outcomes. To establish causality, we use a difference in-differences approach that relies on plausibly exogenous variations generated by staggered recognition of the inevitable disclosure doctrine (IDD). We find that a reduction in human capital mobility reduces VCs' investment propensity and successful exits. Further analysis shows that the effects are more pronounced in industries with more high-skilled workers, with higher patenting intensity, or in earlier-stage VC investment. To mitigate the adverse effect of the IDD, VCs stage finance startups more and are more likely to syndicate with other VCs. Finally, we show that the IDD reduces the mobility of inventors, which contributes to the reduction in startups' patenting and successful exits. Our paper sheds new light on the effects of an important but under-explored determinant of VC investment - the human capital of startups.

Keywords: Venture capital, inevitable disclosure doctrine, human capital risk

JEL Classification: G24, G23, G34

Suggested Citation

Gu, Lifeng and Huang, Ruidi and Mao, Yifei and Tian, Xuan, How Does Human Capital Matter? Evidence from Venture Capital (October 27, 2017). Kelley School of Business Research Paper No. 17-72. Available at SSRN: https://ssrn.com/abstract=3060837 or http://dx.doi.org/10.2139/ssrn.3060837

Lifeng Gu

The University of Hong Kong ( email )

Hong Kong
+852 3917-1033 (Phone)

HOME PAGE: http://https://sites.google.com/site/uiuclifenggu/

Ruidi Huang

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://sites.google.com/site/huangruidi/

Yifei Mao (Contact Author)

Cornell University - SC Johnson College of Business - Finance Department ( email )

Ithaca, NY 14850
United States

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

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