The origins of financial innovations have attracted little empirical scrutiny. Using Wall Street Journal articles as an indicator, this paper examines which institutions were the key financial innovators between 1990 and 2002. The evidence suggests that smaller firms account for a disproportionate share of the innovations. Less profitable firms innovate more, though in the years subsequent to the introduction of the innovation, the profitability of the innovators increases significantly. Finally, older, less leveraged firms located in regions with more financial innovations innovate more. While several of the determinants of patenting are similar, small and unprofitable firms do not patent disproportionately.

This paper examines the timing of initial public offerings and private financings by venture capitalists. Using a sample of 350 privately held venture-backed biotechnology firms between 1978 and 1992, I show that these companies go public when equity valuations are high and employ private financings when values are lower. Seasoned venture capitalists appear to be particularly proficient at taking companies public near market peaks. The results are robust to a variety of controls and alternative explanations.

The economics of partnerships have been of enduring interest to economists, yet it is not clear what profit sharing within a private partnership should look like. We examine over 700 private equity partnerships and show that the allocation of fund economics to individual partners varies drastically, even among the most senior partners, and appears divorced from past success as an investor, being instead related to status as a founder. A smaller share of carried interest and ownership—and inequality in fund economics more generally—is associated with departures of senior partners which, in turn is negatively related to the funds’ ability to raise additional capital.

This paper presents the theory that managers can use the liquidity of securities as a choice variable to screen for deep-pocket investors, those that have a low likelihood of facing a liquidity shock. We assume an information asymmetry about the quality of the manager between the existing investors and the market. The manager then faces a lemons problem when he has to raise funds for a subsequent fund from outside investors, because the outsiders cannot determine whether the manager is of poor quality or the existing investors were hit by a liquidity shock. Thus, liquid investors can reduce the manager's cost of capital in future fundraising. We test the assumptions and predictions of our model in the context of the private equity industry. Consistent with the theory, we find that transfer restrictions on investors are less common in later funds organized by the same private equity firm, where information problems are presumably less severe. Also, partnerships whose investment focus is in industries with longer investment cycles display more transfer constraints. Finally, we present evidence consistent with the assumptions of our model, including the high degree of continuity in the investors of successive funds and the ability of sophisticated investors to anticipate funds that will have poor subsequent performance.

This paper explores the creation and evolution of new stock exchanges around the world geared toward entrepreneurial companies, known as second-tier exchanges. Using hand-collected novel data, we show the proliferation of these exchanges in many countries, their significant volume of Initial Public Offerings (IPOs), and lower listing requirements. Shareholder protection strongly predicted exchange success, even in countries with high levels of venture capital activity, patenting, and financial market development. Better shareholder protection allowed younger, less-profitable, but faster-growing, companies to raise more capital. These results highlight the importance of institutions in enabling the provision of entrepreneurial capital to young companies.

Reverse leveraged buyouts (RLBOs) have received increased public scrutiny but attracted little systematic study. We collect a comprehensive sample of 526 RLBOs between 1981 and 2003 and examine the three-year and five-year stock performance of these offerings. RLBOs appear to perform as well as or better than other initial public offerings and the stock market as a whole, depending on the specification. Evidence exists of a deterioration of returns over time.

We show that inflows of capital into venture funds increase the valuation of these funds’ new investments. This effect is robust to (i) controlling for firm characteristics and public market valuations, (ii) examining first differences, and (iii) using inflows into leveraged buyout funds as an instrumental variable. Interaction terms suggest that the impact of venture capital inflows on prices is greatest in states with the most venture capital activity. Changes in valuations do not appear related to the ultimate success of these firms. The findings are consistent with competition for a limited number of attractive investments being responsible for rising prices.

Using previously unexplored custodial data, we examine alternative investment vehicles (AVs) in private equity (PE) funds over the last four decades. By 2017, AVs reached 40% of all PE commitments. Average AV performance matches the PE market, but underperforms the main funds of the partnerships sponsoring the AVs. Limited partners (LPs) with better past performance invest in AVs with better average performance, even after conditioning on the general partners’ (GPs’) past records. This result is largely driven by preferential access of top LPs to top AVs. Returns in PE increasingly depend on the match between GPs and LPs and both parties’ outside options.

We examine 20 years of direct private equity investments by seven large institutions. These direct investments perform better than public market indices, especially buyout investments and those made in the 1990s. Outperformance by the direct investments, however, relative to the corresponding private equity fund benchmarks is limited and concentrated among buyout transactions. Co-investments underperform the corresponding funds with which they co-invest, due to an apparent adverse selection of transactions available to these investors, while solo transactions outperform fund benchmarks. Investors’ ability to resolve information problems appears to be an important driver of solo deal outcomes.