Investor Horizon and the Life Cycle of Innovative Firms: Evidence from Venture Capital


Management Science

septembre 2017, vol. 63, n°9, pp.3021-3043

Départements : Finance

Mots clés : finance; innovation; venture capital; entrepreneurship; investor horizon

This paper studies whether and how the contractual horizon of venture capital funds affects their investments in innovative firms. I find that funds with a longer remaining horizon select younger companies at an earlier stage of their development, which grow their patent stock significantly more than companies financed by funds with a shorter horizon. The sensitivity of investment decisions to horizon is stronger among experienced venture capital firms, who allocate investments across a larger number of fund vintages. Finally, I find that the interaction of funds’ fixed horizon with their option-like compensation structure affects their investment decisions: when early performance has been high, fund managers target less innovative companies. These findings shed light on the drivers of venture capital investment decisions and on their implications for the type of companies that receive venture capital financing

Linear-Rational Term Structure Models


The Journal of Finance

avril 2017, vol. 72, n°2, pp.655-704

Départements : Finance

We introduce the class of linear-rational term structure models in which the state price density is modeled such that bond prices become linear-rational functions of the factors. This class is highly tractable with several distinct advantages: (i) ensures nonnegative interest rates, (ii) easily accommodates unspanned factors affecting volatility and risk premiums, and (iii) admits semi-analytical solutions to swaptions. A parsimonious model specification within the linear-rational class has a very good fit to both interest rate swaps and swaptions since 1997 and captures many features of term structure, volatility, and risk premium dynamics—including when interest rates are close to the zero lower bound

No-trade in second-price auctions with entry costs and secret reserve prices


Economics Letters

juillet 2017, vol. 156, pp.142-144

Départements : Finance, GREGHEC (CNRS)

Mots clés : Auctions, Entry, Participation costs, Reserve prices, No-trade equilibria

We consider a second-price private-value auction in the presence of an exogenous participation cost and a secret reserve price endogenously set by the seller. We show that, if the entry cost is strictly positive, the only equilibrium outcome is that the seller chooses a reserve price that deters entry and no buyer enters

Relative Optimism and the Home Bias Puzzle


Review of Finance

août 2017, vol. 21, n°5, pp.2045–2074

Départements : Finance

Mots clés : G15 - International Financial Markets G02 - Behavioral Finance: Underlying Principles

We study whether relative optimism leads to home bias in portfolio holdings by looking at two novel databases: a survey that includes expectations of identified professional asset management companies for equity, bonds, and currencies, and the International Monetary Fund portfolio holdings data for equity and bonds. We document that relative optimism for equity is persistent over the period 1997–2012, but relative optimism for bonds and currencies exhibits more time-series variation. Moreover, we show that relative optimism is an economically significant variable that helps explain home bias in portfolio holdings, not only for equity, but also for bonds

Risk-Based Capital Requirements for Banks and International Trade


Review of Financial Studies

novembre 2017, vol. 30, n°11, pp.3970-4002

Départements : Economie et Sciences de la décision, GREGHEC (CNRS), Finance

We test the trade finance channel of exports by controlling for the bank credit channel. Using Turkey’s July 2012 adoption of Basel II as a quasi-natural experiment, we examine whether shocks to trade financing costs affect exports. With data for 16,662 Turkish exporters shipping 2,888 different products to 158 countries, we find that the share of letters-of-credit-based exports decreases (increases) when the associated risk weights for counterparty exposure increase (decrease) after the adoption of Basel II. However, growth of firm-product-country-level exports remains unaffected. Trade financing might have a lesser role in exports than previously suggested by the previous literature. © The Author 2017. Published by Oxford University Press on behalf of The Society for Financial Studies

Systemic Risk in Clearing Houses: Evidence from the European Repo Market


Journal of Financial Economics

septembre 2017, vol. 125, n°3, pp.511-536

Départements : Finance, GREGHEC (CNRS)

Mots clés : repurchase agreement; sovereign debt crisis; LTRO; secured money market lending; clearing houses

We study how crises affect Central Clearing Counterparties (CCPs). We focus on a large and safe segment of CCP-cleared repo market during the Eurozone sovereign debt crisis. We develop a simple model to infer CCP stress, which is measured as repo rates’ sensitivity to sovereign CDS spreads and jointly captures (1) the effectiveness of haircut policies, (2) CCP-member default risk (conditional on sovereign default), and (3) CCP default risk (conditional on both sovereign and CCP-member default). During 2011, repo rates strongly respond to sovereign risk, particularly for GIIPS countries: repo investors behaved as if the conditional probability of CCP default was substantial. (100 words)

Taxing the Rich


Review of Economic Studies

1er juillet 2017, vol. Volume 84, n°Issue 3, pp.1186-1209

Départements : Finance, GREGHEC (CNRS)

Affluent households can respond to taxation with means that are not economically viable for the rest of the population, such as sophisticated tax plans and international tax arbitrage. This paper studies an economy in which an inequality-averse social planner faces agents who have access to a tax-avoidance technology with subadditive costs, and who can shape the risk profile of their income as they see fit. Subadditive avoidance costs imply that optimal taxation cannot be progressive at the top. This in turn may trigger excessive risk taking. When the avoidance technology consists in costly migration between two countries that compete fiscally, we show that an endogenous increase in inequality due to risk taking makes progressive taxation more fragile, which vindicates in turn risk taking and can lead to equilibria with regressive tax rates at the top, and high migrations of wealth toward the smaller country

The Political Economy of Financial Innovation: Evidence from Local Governments


Review of Financial Studies

juin 2017, vol. 30, n°6, pp.1903-1934

Départements : Finance, GREGHEC (CNRS)

We investigate the development of an innovative and high-risk type of borrowing for local governments, known as structured loans. Using transaction data for more than 2,700 local governments in France, we show that the adoption of these instruments is more frequent for politicians from highly indebted local governments, from politically contested areas, and during political campaigns. Taking on structured loans helps incumbents win a reelection, and initially allows them to maintain lower taxes. Our findings illustrate how financial innovation can amplify principal-agent problems within the political system

The Real Effects of Lending Relationships on Innovative Firms and Inventor Mobility


Review of Financial Studies

juillet 2017, vol. 30, n°7, pp.2413–2445

Départements : Finance, GREGHEC (CNRS)

Mots clés : Lending relationships, Soft information, Innovation, Inventors

We study whether relationship lending is conducive to the financing of innovation. Exploiting a negative shock to relationships, we show that it reduces the number of innovative firms, especially those that depend more on relationship lending such as small, young, and opaque firms. This credit supply shock leads to reallocation of inventors whereby young and promising inventors leave small firms and move out of geographical areas where lending relationships are hurt. Overall, our results suggest that credit markets affect both the level of innovation activity and the distribution of innovative human capital across the econom

Toxic Arbitrage


Review of Financial Studies

avril 2017, vol. 30, n°4, pp.1053-1094

Départements : Finance, GREGHEC (CNRS)

Short-lived arbitrage opportunities arise when prices adjust with a lag to new information. They are toxic because they expose dealers to the risk of trading at stale quotes. Hence, theory implies that more frequent toxic arbitrage opportunities and faster responses to these opportunities should impair liquidity. We provide supporting evidence using data on triangular arbitrage. As predicted, illiquidity is higher on days when the fraction of toxic arbitrage opportunities and arbitrageurs’ relative speed are higher. Overall, our findings suggest that the price efficiency gain of high-frequency arbitrage comes at the cost of increased adverse selection risk