Hostname: page-component-78c5997874-s2hrs Total loading time: 0 Render date: 2024-11-14T01:56:25.608Z Has data issue: false hasContentIssue false
  • English
  • Français

How Does Human Capital Matter? Evidence from Venture Capital

Published online by Cambridge University Press:  28 August 2020

Lifeng Gu ,
Ruidi Huang ,
Yifei Mao  and
Xuan Tian
Lifeng Gu
Affiliation:
University of Hong Kong oliviagu@hku.hk
Ruidi Huang
Affiliation:
Southern Methodist University Cox School of Business ruidih@smu.edu
Yifei Mao
Affiliation:
Cornell University SC Johnson College of Business ym355@cornell.edu
Xuan Tian*
Affiliation:
Tsinghua University PBC School of Finance
*
tianx@pbcsf.tsinghua.edu.cn (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine the effect of labor mobility on venture capital (VC) investment. Following the staggered adoption of the inevitable disclosure doctrine that restricts labor mobility, VCs are less likely to invest in affected states. This effect is more pronounced when human capital is more important to startups, when VC investment is more uncertain, and when VCs’ monitoring costs are higher. The reduced innovation productivity of employees is a plausible underlying mechanism. To mitigate this adverse effect, VCs stage finance startups more and syndicate more with other VCs. Our paper sheds new light on the real effects of labor market frictions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 6 , September 2022 , pp. 2063 - 2094
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Philip Dybvig, Dirk Hackbarth, Jarrad Harford (the editor), Josh Lerner, Roni Michaely, Matthew Serfling (the referee), Shan Tin, Michael Weisbach, Hong Zou, conference participants at the 2018 China International Conference in Finance, and the 2018 Sun Yat-Sen University Finance International Conference for helpful comments. Mao acknowledges financial support from the Renata and Alexander Weiss Sesquicentennial Faculty Fellowship from Cornell University. Tian acknowledges financial support from the National Natural Science Foundation of China (Grant Nos. 71790591, 71825002, and 91746301) and the Beijing Outstanding Young Scientist Program (BJJWZYJH 01201910003014). We remain responsible for any errors and omissions.

References

Acharya, V.; Baghai, R.; and Subramanian, K.. “Wrongful Discharge Laws and Innovation.” Review of Financial Studies, 27 (2014), 301–346.CrossRefGoogle Scholar
Amornsiripanitch, N.; Gompers, P.; and Xuan, Y.. “More than Money: Venture Capitalists on Boards.” Journal of Law, Economics, and Organization, 35 (2019), 513–543.CrossRefGoogle Scholar
Anton, J., and Yao, D.. “Little Patents and Big Secrets: Managing Intellectual Property.” RAND Journal of Economics, 35 (2004), 1–22.CrossRefGoogle Scholar
Bayar, O.; Chemmanur, T.; and Tian, X.. “Peer Monitoring, Syndication, and the Dynamics of Venture Capital Interactions: Theory and Evidence.” Journal of Financial and Quantitative Analysis, 55 (2020), 1875–1914.CrossRefGoogle Scholar
Bertrand, M., and Mullainathan, S.. “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences.” Journal of Political Economy, 111 (2003), 1043–1075.Google Scholar
Bird, R., and Knopf, J.. “The Impact of Local Knowledge on Banking.” Journal of Financial Services Research, 48 (2015), 1–20.CrossRefGoogle Scholar
Bolton, P.; Wang, N.; and Yang, J.. “Optimal Contracting, Corporate Finance, and Valuation with Inalienable Human Capital.” Journal of Finance, 74 (2019), 1363–1429.CrossRefGoogle Scholar
Bottazzi, L.; Da Rin, M.; and Hellmann, T.. “The Importance of Trust for Investment: Evidence from Venture Capital.” Review of Financial Studies, 29 (2016), 2283–2318.CrossRefGoogle Scholar
Brander, J.; Amit, R.; and Antweiler, W.. “Venture-Capital Syndication: Improved Venture Selection vs. the Value-Added Hypothesis.” Journal of Economics & Management Strategy, 11 (2002), 423–452.Google Scholar
Castellaneta, F.; Conti, R.; Veloso, F.; and Kemeny, C.. “The Effect of Trade Secret Legal Protection on Venture Capital Investments: Evidence from the Inevitable Disclosure Doctrine.” Journal of Business Venturing, 31 (2016), 524–541.CrossRefGoogle Scholar
Chemmanur, T.; Loutskina, E.; and Tian, X.. “Corporate Venture Capital, Value Creation, and Innovation.” Review of Financial Studies, 27 (2014), 2434–2473.CrossRefGoogle Scholar
Chemmanur, T.; Simonyan, K.; and Tehranian, H.. “The Role of Management Quality in the IPOs of Venture-Backed Entrepreneurial Firms.” Working Paper, Boston College (2016).Google Scholar
Chen, D.; Gao, H.; and Ma, Y.. “Human Capital Driven Acquisition: Evidence from the Inevitable Disclosure Doctrine.” Management Science, forthcoming (2020).Google Scholar
Contigiani, A.; Hsu, D.; and Barankay, I.. “Trade Secrets and Innovation: Evidence from the ‘Inevitable Disclosure’ Doctrine.” Strategic Management Journal, 39 (2018), 2921–2942.CrossRefGoogle Scholar
Da Rin, M.; Hellmann, T.; and Puri, M.. “A Survey of Venture Capital Research.” Handbook of the Economics of Finance, 2 (2013), 573–648.CrossRefGoogle Scholar
Ewens, M., and Marx, M.. “Founder Replacement and Startup Performance.” Review of Financial Studies, 31 (2018), 1532–1565.CrossRefGoogle Scholar
Fleming, L. “Recombinant Uncertainty in Technological Search.” Management Science, 47 (2001), 117–132.CrossRefGoogle Scholar
Fulghieri, P., and Sevilir, M.. “Mergers, Spinoffs, and Employee Incentives.” Review of Financial Studies, 24 (2011), 2207–2241.CrossRefGoogle Scholar
Garmaise, M. “Ties that Truly Bind: Noncompetition Agreements, Executive Compensation, and Firm Investment.” Journal of Law, Economics, and Organization, 27 (2011), 376–425.CrossRefGoogle Scholar
Gibbons, R.; Katz, L.; Lemieux, T.; and Parent, D.. “Comparative Advantage, Learning, and Sectoral Wage Determination.” Journal of Labor Economics, 23 (2005), 681–724.CrossRefGoogle Scholar
Giroud, X., and Mueller, H.. “Does Corporate Governance Matter in Competitive Industries?” Journal of Financial Economics, 95 (2010), 312–331.CrossRefGoogle Scholar
Gompers, P. “Optimal Investment, Monitoring, and the Staging of Venture Capital.” Journal of Finance, 50 (1995), 1461–1489.CrossRefGoogle Scholar
Gompers, P.; Mukharlyamov, V.; and Xuan, Y.. “The Cost of Friendship.” Journal of Financial Economics, 119 (2016), 626–644.Google Scholar
Hall, B., and Lerner, J.. “The Financing of R&D and Innovation.” In Handbook of the Economics of Innovation, Vol. 1, Hall, B. and Rosenberg, N., eds. Amsterdam: Elsevier-North Holland (2010), 609–639.CrossRefGoogle Scholar
Hart, O., and Moore, J.. “A Theory of Debt Based on the Inalienability of Human Capital.” Quarterly Journal of Economics, 109 (1994), 841–879.CrossRefGoogle Scholar
Hellmann, T., and Perotti, E.. “The Circulation of Ideas in Firms and Markets.” Management Science, 57 (2011), 1813–1826.CrossRefGoogle Scholar
Hellmann, T., and Puri, M.. “The Interaction Between Product Market and Financing Strategy: The Role of Venture Capital.” Review of Financial Studies, 13 (2000), 959–984.Google Scholar
Jeffers, J. “The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship.” Working Paper, University of Chicago (2019).Google Scholar
Kaplan, S., and Stromberg, P.. “Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts.” Review of Economic Studies, 70 (2003), 281–315.CrossRefGoogle Scholar
Klasa, S.; Ortiz-Molina, H.; Serfling, M.; and Srinivasan, S.. “Protection of Trade Secrets and Capital Structure Decisions.” Journal of Financial Economics, 128 (2018), 266–286.Google Scholar
Kogan, L; Papanikolaou, D.; Seru, A.; and Stoffman, N.. “Technological Innovation, Resource Allocation, and Growth.” Quarterly Journal of Economics, 132 (2017), 665–712.CrossRefGoogle Scholar
Lerner, J. “The Syndication of Venture Capital Investments.” Financial Management. 23 (1994), 16–27.Google Scholar
Malsberger, B. Covenants not to Compete: A State-by-State Survey. 11th ed., Arlington, VA: Bloomberg BNA (2017).Google Scholar
Mansfield, E. “Patents and Innovation: An Empirical Study.” Management Science, 32 (1986), 173–181.CrossRefGoogle Scholar
Marx, M.; Strumsky, D.; and Fleming, L.. “Mobility, Skills, and the Michigan Non-Compete Experiment.” Management Science, 55 (2009), 875–889.CrossRefGoogle Scholar
Ouimet, P., and Zarutskie, R.. “Acquiring Labor.” Working Paper, University of North Carolina at Chapel Hill (2016).Google Scholar
Png, I. P. L. “Law and Innovation: Evidence from State Trade Secrets Laws.” Review of Economics and Statistics, 99 (2017a), 167–179.CrossRefGoogle Scholar
Png, I. P. L. “Secrecy and Patents: Theory and Evidence from the Uniform Trade Secrets Act.” Strategy Science, 2 (2017b), 176–193.Google Scholar
Qiu, B, and Wang, T.. “Does Knowledge Protection Benefit Shareholders? Evidence from Stock Market Reaction and Firm Investment in Knowledge Assets.” Journal of Financial and Quantitative Analysis, 53 (2018), 1341–1370.Google Scholar
Sahlman, W. “Aspects of Financial Contracting in Venture Capital.” Journal of Applied Corporate Finance, 1 (1988), 23–36.CrossRefGoogle Scholar
Sahlman, W. “The Structure and Governance of Venture Capital Organizations.” Journal of Financial Economics, 27 (1990), 473–521.CrossRefGoogle Scholar
Samila, S., and Sorenson, O.. “Noncompete Covenants: Incentives to Innovate or Impediments to Growth.” Management Science, 57 (2011), 425–438.Google Scholar
Sørensen, M. “How Smart is Smart Money? A Two-Sided Matching Model of Venture Capital.” Journal of Finance, 62 (2007), 2725–2762.CrossRefGoogle Scholar
Spence, M. “Job Market Signaling.” Quarterly Journal of Economics, 87 (1973), 355–374.Google Scholar
Tian, X. “The Causes and Consequences of Venture Capital Stage Financing.” Journal of Financial Economics, 101 (2011), 132–159.CrossRefGoogle Scholar
Tian, X. “The Role of Venture Capital Syndication in Value Creation for Entrepreneurial Firms.” Review of Finance, 16 (2012), 245–286.CrossRefGoogle Scholar
Tian, X.; Udell, G.; and Yu, X.. “Disciplining Delegated Monitors: When Venture Capitalists Fail to Prevent Fraud by Their IPO Firms.” Journal of Accounting and Economics, 61 (2016), 526–544.CrossRefGoogle Scholar
Tian, X., and Wang, T.. “Tolerance for Failure and Corporate Innovation.” Review of Financial Studies, 27 (2014), 211–255.CrossRefGoogle Scholar
Zingales, L. “In Search of New Foundations.” Journal of Finance, 55 (2000), 1623–1653.CrossRefGoogle Scholar
Supplementary material: PDF

Gu et al. supplementary material

Online Appendix

Download Gu et al. supplementary material(PDF)
PDF 549.6 KB