USC Marshall

We use new hand-collected data from corporate filings to study the drivers of corporate capital structure adjustment. Classifying firms by their adjustment frequencies, we reveal previously unknown patterns in their reasons for financing and financial instruments used. Some are consistent with existing theory, while others are understudied. Many leverage changes are outside of the firm's control (e.g., executive option exercise) or incur negligible adjustment costs (e.g., credit line usage). This implies a lower frequency of proactive leverage adjustments than indicated by prior research using accounting data, suggesting that costs of adjustment are higher, or the benefits lower, than previously thought.

We estimate the impact of venture capital (VC) contract terms on startup outcomes and the split of value between the entrepreneur and investor, accounting for endogenous selection via a novel dynamic search-and-matching model. The estimation uses a new, large data set of first financing rounds of startup companies. Consistent with efficient contracting theories, there is an optimal equity split between agents, which maximizes the probability of success. However, venture capitalists (VCs) use their bargaining power to receive more investor-friendly terms compared to the contract that maximizes startup values. Better VCs still benefit the startup and the entrepreneur due to their positive value creation. Counterfactuals show that reducing search frictions shifts the bargaining power to VCs and benefits them at the expense of entrepreneurs. The results show that the selection of agents into deals is a first-order factor to take into account in studies of contracting.

We survey the literature on the private equity partnership arrangement from the perspective of an outside investor (limited partner). We examine how the partnership arrangement fits into a broader portfolio of investments, and we consider the methods and difficulties in performance measurement, both at the fund level and at the asset class level. We follow with a discussion of performance persistence and the skill and pricing power of both general and limited partners. We continue by examining the limited partner's problem of managing commitments and investments over time while diversifying across funds in light of both idiosyncratic and systematic shocks. We close with a summary of recent work on optimal portfolio allocation to private equity. Throughout, we consider how empirical work and theory match the particular institutional details of private equity, and we identify 27 open questions to help guide private equity research forward.

VC: An American History offers a compelling chronicle of the development of professional venture capital (VC) in the United States, from VC-like forebearers as diverse as 18^th century cotton manufacturing and 19^th century whaling up to the state of the modern VC market at the turn of the millennium. The book emphasizes America’s enduring advantage in venture capital as a consequence of these early developments and as a practical governance solution for investing in the long-tailed returns of risky new ventures. In this essay we discuss similar historical precedent and governance arrangements in the spice trading voyages of the 16^th and 17^th century Dutch Republic, calling into question the uniqueness of the early American VC ancestors. Moreover, far from being a distinguishing feature of early ventures, long-tailed returns exist even in public equities, suggesting that the VC governance structure is about more than the distribution of returns. We conclude that the reasons for American dominance of contemporary VC remain unclear. Picking up where the book leaves off, we summarize facts and trends in 21^st century venture capital.

This article reviews empirical methods to assess risk and return in private
equity. I discuss data and econometric issues for fund-level, deal-level, and
publicly traded partnerships data. Risk-adjusted return estimates vary substantially by method, time period, and data source. The weight of evidence
suggests that, relative to a similarly risky investment in the stock market,
the average venture capital (VC) fund earned positive risk-adjusted returns
before the turn of the millennium, but net-of-fee returns have been zero
or even negative since. Average leveraged buyout (BO) investments have
generally earned positive risk-adjusted returns both before and after fees,
compared with a levered stock portfolio. Based on an expanded set of risk
factors from the literature, VC resembles a small-growth investment, while
BO loads mostly on value. I also discuss the empirical evidence on liquidity
and idiosyncratic volatility risks.