Most non-executive-directors appointed by early-stage startups are not investors in the startup, and only a small fraction are venture capital (VC) directors. Non-investor-directors and angel directors are more likely to be appointed when they possess experiences that founders lack and leverage their professional connections to attract new investors, directors, top executives, and potential acquirers for startups. Among early-stage startups that appoint nonexecutive directors, those with investor-directors experience better later-stage funding outcomes and a higher likelihood of exit, as well as file fewer patents and are more likely to exit via acquisitions rather than IPOs compared to similar startups with non-investor-directors.

Using hand-collected data, we show that coinvestment is widespread in the angel investment market, even among seed-stage startups. Individual angels with demonstrated seed-stage success experience an increase in the quantity, quality, and geographic and industry spread of their coinvestment connections relative to unsuccessful peers and are rewarded with more deal flow. These results are stronger for less-established angels and for angels whose successes are more indicative of their ability. Success also begets more success: the portfolio companies of successful angels are more likely to receive follow-on financing, especially from VC firms. Our results highlight how angels grow their coinvestment networks.

The bidder's relative value with respect to the target (RV) and its 52-week reference values affect who bids for whom as well as the timing of public announcement for bidder-target pairs that announce deals. Deals that are announced when the RV is near its 52-week high feature more stock payment, higher offer premium relative to the target's pre-announcement price but a larger discount relative to the target's 52-week high price, result in more negative announcement returns for the bidding firm in both the short and long run, and are less likely to be completed. Yet, bidders in such deals also experience large and positive abnormal returns over the period from private initiation of discussions with the target to twelve months after announcement. Our results suggest that bidders use past values of RV as reference points to assess relative misvaluation and to strategically choose announcement timing.

We examine how an exogenous improvement in market efficiency, which allows the stock market to obtain more precise information about the firm's intrinsic value, affects the shareholder–manager contracting problem, managerial incentives, and shareholder value. A key assumption in the model is that stock market investors do not observe the manager's pay-performance sensitivity ex ante. We show that an increase in market efficiency weakens managerial incentives by making the firm's stock price less sensitive to the firm's current performance. The impact on real efficiency and shareholder value varies depending on the composition of the firm's intrinsic value.

Previous empirical studies that decompose the bid-ask spread were done when securities traded in discrete price points equal to one-sixteenth or one-eighth of a dollar. These studies concluded that inventory and adverse-selection costs were economically insignificant compared to order-processing costs. Natural questions arise as to: (i) whether price discreteness allowed market makers to enjoy excess rents, thus reducing the significance of the inventory and adverse selection costs; (ii) whether discreteness decreased the traders' incentives to gather information; or (iii) whether methodologies previously employed mis-estimated the inventory and the adverse-selection costs. We show that the recent conversion to decimal pricing results in significantly tighter spreads. However, the dollar value of spreads attributed to adverse selection and inventory costs do not change significantly. Almost all of the reduction occurs in the order-processing component. As a result, inventory and adverse-selection costs now account for a significantly larger proportion of the traded spreads. A plausible explanation is that the minimum tick size constraint previously in place under fractional pricing allowed market makers to enjoy spreads that were larger than their actual costs.

We find that capital investment and net debt issuance of large firms are, on average, more sensitive to industry business cycles than those of small firms, in stark contrast to the effect of size on investment sensitivity to macroeconomic cycles. We theoretically examine the role of firm size on firms’ responses to industry shocks. Consistent with our theoretical predictions, we find that large firms exhibit greater sensitivity to industry cycles than small firms in their investment and net debt issuance only in industries with low cyclical variability of markups and production growth, high fixed cost intensity, high market-to-book, and high markups.

We analyze how entrepreneurial firms choose between two funding institution: banks, which monitor less intensively and face liquidity demands from their own investors, and venture capitalists, who can monitor more intensively but face a higher cost of capital because of the liquidity constraints that they impose on their own investors. Because the firm's manager prefers continuing the firm over liquidating it and aggressive (risky) continuation strategies over conservative (safe) continuation strategies, the institution must monitor the firm and exercise some control over its decisions. Bank finance takes the form of debt, whereas venture capital finance often resembles convertible debt. Venture capital finance is optimal only when the aggressive continuation strategy is not too profitable, ex ante; the uncertainty associated with the risky continuation strategy (strategic uncertainty) is high; and the firm's cash flow distribution is highly risky and positively skewed, with low probability of success, low liquidation value, and high returns if successful. A decrease in venture capitalists’ cost of capital encourages firms to switch from safe strategies and bank finance to riskier strategies and venture capital finance, increasing the average risk of firms in the economy.

Banks face liquidity and capital pressures that favor selling off the loans they originate, but loan sales undermine their monitoring incentives. A bank’s loan default history is a noisy measure of its past monitoring choices, which can serve as a reputation mechanism to incentivize current monitoring. In equilibrium, higher reputation banks monitor (weakly) more intensively; if retention is credible, they generally retain less of the loans they originate. Monitoring is difficult to sustain in periods with uncommonly large spikes in loan demand (“booms”), especially for low-reputation banks, which are more likely to accommodate boom demand and forgo monitoring.

We examine the joint optimization of financial leverage and irreversible capacity investment in a real options framework with risky debt and endogenous interest costs. Higher capacity, ceteris paribus, increases operating leverage and default probability, but lowers ex post adjustment costs and generates larger tax shields. A key insight is that financial leverage and capacity are substitutes in the debt market equilibrium. We develop novel predictions about the effects of capital adjustment costs, operating costs, and uncertainty on optimal financial leverage and capacity that may potentially help explain ambiguous empirical results in the literature regarding the determinants of capital structure and investment. Received March 17, 2016; editorial decision July 8, 2017 by Editor Itay Goldstein.

We construct a risk management index (RMI) to measure the strength and independence of the risk management function at bank holding companies (BHCs). The U.S. BHCs with higher RMI before the onset of the financial crisis have lower tail risk, lower nonperforming loans, and better operating and stock return performance during the financial crisis years. Over the period 1995 to 2010, BHCs with a higher lagged RMI have lower tail risk and higher return on assets, all else equal. Overall, these results suggest that a strong and independent risk management function can curtail tail risk exposures at banks.