Financing Entrepreneurship: Tax Incentives for Early-Stage Investors

77 Pages Posted: 25 Sep 2019 Last revised: 4 Dec 2019

See all articles by Matthew Denes

Matthew Denes

Carnegie Mellon University - Tepper School of Business

Xinxin Wang

University of North Carolina (UNC) at Chapel Hill - Finance Area

Ting Xu

University of Virginia - Darden School of Business

Date Written: September 1, 2019

Abstract

Governments often subsidize startups with the goal of spurring entrepreneurship using tax incentives. Exploiting the staggered implementation of angel investor tax credits in 31 U.S. states from 1988 to 2018, we find that these programs increase the number of angel investments and average investment size. However, additional investments flow to lower-quality startups that are launched by less experienced entrepreneurs. Despite short-run propping up due to tax credits, angel-backed firms subsequently perform poorly. We find evidence that entry of new inexperienced investors can explain these results. Overall, our findings suggest that state-level investor tax credits are ineffective in promoting high-quality entrepreneurship.

Keywords: entrepreneurship, investor tax credit, angel financing, government subsidy

JEL Classification: E24, G24, H71, L26

Suggested Citation

Denes, Matthew and Wang, Xinxin and Xu, Ting, Financing Entrepreneurship: Tax Incentives for Early-Stage Investors (September 1, 2019). Darden Business School Working Paper No. 3454633; Kenan Institute of Private Enterprise Research Paper No. 19-31. Available at SSRN: https://ssrn.com/abstract=3454633 or http://dx.doi.org/10.2139/ssrn.3454633

Matthew Denes (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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

Xinxin Wang

University of North Carolina (UNC) at Chapel Hill - Finance Area

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Ting Xu

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
113
Abstract Views
636
rank
251,116
PlumX Metrics