Working Papers

1. Capability Accumulation and Conglomeratization in the Information Age (with Matthew Elliott)

Abstract: The past twenty years have witnessed the emergence of internet conglomerates fuelled by acquisitions. We provide a simple theoretical model to shed light on this. We follow a large literature in management (Wernerfelt, 1984) and endow firms with a set of scarce capabilities that drive their competitiveness across markets. This information is naturally represented as a hypergraph (a generalization of a network). Firms can combine their capabilities by merging and also spin-off new firms to partition them. We study the stable industry structures, where there no longer exist any profitable mergers or demergers. Positing that recent changes have caused markets to value new capabilities, particularly those held by internet firms, we show this can explain the conglomeratization of internet firms. Moreover, we find that as markets value more of the same capabilities, changes in industry structure can be abrupt. There is a sharp phase transition in the potential size of the largest firms at a key threshold.

2. What Role Does Angel Finance Play in the Early-stage Capital Market?

Abstract: Despite anecdotal evidence connecting angel and venture capital (VC) financing, there is little systematic evidence on how the two early-stage capital sources interact. To study this topic, I assemble the first comprehensive dataset on angel financing and characterize its size, scope, and role in the early-stage capital market. I use the population of newly incorporated startups located in California, the largest VC financing state in the United States. Here, the angel capital market is large: approximately 4% of all startups receive angel financing within three years of incorporation. At least five times as many startups receive financing from angels as from VCs. Using local individual income as an instrument for angel financing at the zip code level, I show that angels play both supportive and competitive roles in relation to VCs. Angel financing leads to more VC follow-on financing over firms’ life cycles, while it crowds out VC financing from the initial financing round. My results demonstrate the explicit role of angel financing in the early-stage capital market.

3. Crowdfunding without Intermediation?

Abstract: I develop a game-theoretic model to study information asymmetries in the evolving equity crowdfunding market. I assume (1) there are two types of investors: informed (“insiders”) and uninformed (“outsiders”); (2) the insiders invest first; and (3) the outsiders observe the aggregate of insiders’ actions and then decide whether to invest. Under these assumptions, I prove that there does not exist a crowdfunding market equilibrium in which the insiders’ information is aggregated and high quality startups are funded with higher chances. I then use data from Regulation crowdfunding (Title III equity crowdfunding), and provide evidence that is consistent with the model implications. My results suggest that adverse selection is a primary barrier to equity crowdfunding, and new market designs are required to better develop this market.