This paper presents an information-theoretic model of initial public offering pricing in which insiders sell stock in both the initial public offering and the secondary market, have private information about their firm's prospects, and outsiders may engage in costly information production about the firm. High-value firms, knowing they are going to pool wit h low-value firms, induce outsiders to engage in information productio n by underpricing, which compensates outsiders for the cost of produci ng information. The information is reflected in the secondary market pr ice of equity, giving a higher expected stock price for high-value firms.

The increasingly large role played by financial intermediaries, such as venture capitalists and angels, in nurturing entrepreneurial firms and in promoting product market innovation has led to great research interest in the area of entrepreneurial finance and innovation. This paper introduces the special issue of the Review of Financial Studies dedicated to entrepreneurial finance and innovation and highlights some of the promising topics for future research in this area. The special issue combines papers presented at the June 2010 "Entrepreneurial Finance and Innovation (EFIC)" conference, which was jointly sponsored by the Kauffman Foundation and the Review of Financial Studies, with other related papers.

[We address the question: At what stage in its life should a firm go public rather than undertake its projects using private equity financing? In our model a firm may raise external financing either by placing shares privately with a risk-averse venture capitalist or by selling shares in an IPO to numerous small investors. The entrepreneur has private information about his firm's value, but outsiders can reduce this informational disadvantage by evaluating the firm at a cost. The equilibrium timing of the going-public decision is determined by the firm's trade-off between minimizing the duplication in information production by outsiders (unavoidable in the IPO market, but mitigated by a publicly observable share price) and avoiding the risk-premium demanded by venture capitalists. Testable implications are developed for the cross-sectional variations in the age of going-public across industries and countries.]

[We model firms' choice between bank loans and publicly traded debt, allowing for debt renegotiation in the event of financial distress. Entrepreneurs, with private information about their probability of financial distress, borrow from banks (multiperiod players) or issue bonds to implement projects. If a firm is in financial distress, lenders devote a certain amount of resources (unobservable to entrepreneurs) to evaluate whether to liquidate the firm or to renegotiate its debt. We demonstrate that banks' desire to acquire a reputation for making the "right" renegotiation versus liquidation decision provides them an endogenous incentive to devote a larger amount of resources than bondholders toward such evaluations. In equilibrium, bank loans dominate bonds from the point of view of minimizing inefficient liquidation; however, firms with a lower probability of financial distress choose bonds over bank loans.]

The authors model reputation acquisition by investment banks in the equity market. Entrepreneurs sell shares in an asymmetrically informed equity market either directly or using an investment bank. Investment banks, who interact repeatedly with the equity market, evaluate entrepreneurs' projects and report to investors in return for a fee. Setting strict evaluation standards (unobservable to investors) is costly for investment banks, inducing moral hazard. Investment banks' credibility, therefore, depends on their equity-marketing history. Investment banks' evaluation standards, their reputations, underwriter compensation, the market value of equity sold, and entrepreneurs' choice between underwritten and nonunderwritten equity issues emerge endogenously.

[In this article, we use a large sample of transaction-level institutional trading data to analyze the role of institutional investors in initial public offerings (IPOs). The theoretical literature on IPOs has long argued that institutional investors possess private information about IPOs and that underpricing is a mechanism for compensating them to reveal this private information. We study whether institutions indeed have private information about IPOs, retain their information advantage in post-IPO trading, and are able to realize significant profits from their participation in IPOs. We also study institutional IPO allocations and allocation sales to analyze whether institutions play an important role in supporting IPOs in the aftermarket and are rewarded by underwriters for playing such a role. We find that institutions sell 70.2% of their IPO allocations in the first year, fully realize the "money left on the table," and do not dissipate these profits in post-IPO trading. Further, institutions hold allocations in IPOs with weaker post-issue demand for a longer period, and they are rewarded for this by underwriters with more IPO allocations. Finally, institutional trading has predictive power for long-run IPO performance, especially in IPOs in which they received allocations; however, this predictive power decays over time. Overall, our results suggest that institutional investors possess significant private information about IPOs, play an important supportive role in the IPO aftermarket, and receive considerable compensation for their participation in IPOs.]

[We use the Longitudinal Research Database (LRD) of the U. S. Census Bureau, which covers the entire universe of private and public U. S. manufacturing firms, to study several related questions regarding the efficiency gains generated by venture capital (VC) investment in private firms. First, do VCs indeed improve the efficiency (total factor productivity, TFP) of private firms, and if so, are certain kinds of VCs (high reputation vs. low reputation) better at generating such efficiency gains than others? Second, do VCs invest in more efficient firms to begin with (screening), or do they improve efficiency after investment (monitoring)? Third, do efficiency improvements due to VC backing arise from increases in sales or reductions in costs? Fourth, do VC backing and the associated efficiency gains affect the probability of a successful exit (IPO or acquisition)? Our analysis shows that the overall efficiency of VC-backed firms is higher than that of non-VC-backed firms at every point in time. This efficiency advantage of VC-backed firms arises from both screening and monitoring: The efficiency of VC-backed firms prior to receiving financing is higher than that of non-VC-backed firms, and further, the growth in efficiency subsequent to VC financing is greater for such firms. The above increases in efficiency of VC-backed firms are spread over the first two rounds of VC financing after which the TFP of such firms remains constant until exit. Additionally, we show that while the TFP of firms prior to receiving financing is lower for high-reputation VC-backed firms, the increase in TFP subsequent to financing is significantly greater for these firms, consistent with high-reputation VCs having greater monitoring ability. We disentangle the screening and monitoring effects of VC backing using three different methodologies: switching regression with endogenous switching, regression discontinuity analysis, and propensity score matching. We show that while overall efficiency gains generated by VC backing arise primarily from improvements in sales, the efficiency gains of high-reputation VCbacked firms arise also from lower increases in production costs. Finally, we show that VC backing and the associated efficiency gains positively affect the probability of a successful exit.]

[At what point in a firm's life should it go public? How do a firm's ex ante product market characteristics relate to its going-public decision? Further, what are the implications of a firm going public on its post-IPO operating and product market performance? In this article, we answer the above questions by conducting the first large sample study of the going-public decisions of U.S. firms in the literature. We use the Longitudinal Research Database (LRD) of the U.S. Census Bureau, which covers the entire universe of private and public U.S. manufacturing firms. Our findings can be summarized as follows. First, a private firm's product market characteristics (total factor productivity [TFP], size, sales growth, market share, industry competitiveness, capital intensity, and cash flow riskiness) significantly affect its likelihood of going public after controlling for its access to private financing (venture capital or bank loans). Second, private firms facing less information asymmetry and those with projects that are cheaper for outsiders to evaluate are more likely to go public. Third, as more firms in an industry go public, the concentration of that industry increases in subsequent years. The above results are robust to controlling for the interactions between various product market and firm-specific variables. Fourth, IPOs of firms occur at the peak of their productivity cycle: the dynamics of TFP and sales growth exhibit an inverted U-shaped pattern, both in our univariate analysis and in our multivariate analysis using firms that remained private throughout as a benchmark. Finally, sales, capital expenditures, and other performance variables exhibit a consistently increasing pattern over the years before and after the IPO. The last two findings are consistent with the view that the widely documented post-IPO operating underperformance of firms is due to the real investment effects of going public rather than being due to earnings management immediately prior to the IPO.]