Is There a Trade-Off between Protecting Investors and Promoting Entrepreneurial Activity? Evidence from Angel Financing

Journal of Financial and Quantitative Analysis, Forthcoming

86 Pages Posted: 31 Dec 2019 Last revised: 20 Jun 2022

See all articles by Jiajie Xu

Jiajie Xu

University of Iowa - Henry B. Tippie College of Business

Date Written: December 5, 2019

Abstract

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, IPO and acquisition

JEL Classification: G24, G28, L26, K22

Suggested Citation

Xu, Jiajie, Is There a Trade-Off between Protecting Investors and Promoting Entrepreneurial Activity? Evidence from Angel Financing (December 5, 2019). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3510686 or http://dx.doi.org/10.2139/ssrn.3510686

Jiajie Xu (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Pappajohn Business Building S296
Iowa City, IA 52242-1000
United States

HOME PAGE: http://www.jiajiexu.com/

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