Is There a Trade-Off between Protecting Investors and Promoting Entrepreneurial Activity? Evidence from Angel Financing
78 Pages Posted: 31 Dec 2019 Last revised: 21 Dec 2021
Date Written: December 5, 2019
This paper studies how changes in investor protection regulations affect local entrepreneurial activity, relying on the heterogeneous impact of a 2011 SEC regulation change on the definition of accredited investors across U.S. cities. Using a difference-in-differences approach, I show that cities more affected by the regulation change experienced a significantly larger decrease in local angel financing, entrepreneurial activity, innovation output, employment, and sales. I find that small business loans and second-lien mortgages became entrepreneurs’ partial substitutes for angel investment. My cost-benefit analysis suggests that the costs of protecting angel investors through the 2011 regulation change outweigh its benefits.
Keywords: Angel financing, Investor protection, Entrepreneurship, Innovation, Regulation
JEL Classification: G24, G28, L26, K22
Suggested Citation: Suggested Citation