April M. Knill

Should Venture Capitalists Put All Their Eggs in One Basket? Diversification Versus Pure Play Strategies in Venture Capital

Managing the different companies in which they invest and at the same time performing portfolio optimization for themselves, venture capitalists position themselves as a pure-play or diversified conglomerate through their cumulative portfolios. I examine the effects of two investment strategies of venture capitalists: a specialist pure-play strategy that maximizes venture capital involvement, and a more generalist strategy of diversification at the firm level that minimizes portfolio risk. I find that neither strategy optimizes both venture capital growth and time to entrepreneurial exit, which highlights a need for institutional investors to clarify fund objectives at the time a fund is established.

Determinants of Sovereign Wealth Fund Investment in Private Equity

This paper examines investment patterns of 50 sovereign wealth funds (SWFs) in nations around the world. We study investment by SWFs in 903 public and private firms over the period 1984-2009. As expected, we observe SWFs investments are more often in private firms when the market returns of target nations are negatively correlated to the market returns of the SWF nations. But counter to expectations, the data indicate that SWFs are more likely to invest in private firms of target nations with weaker legal conditions, and when the legal differences between the SWF country and the target country are more pronounced. This evidence is consistent with strategic rationales for investment and potential corporate governance conflicts.

Negation of Sanctions: The Personal Effect of Political Contributions

Using data on political contributions and government enforcement actions from 1999 through 2010, we document a negative relationship between political contributions and the severity of government enforcement outcomes. Specifically, a

Bilateral Political Relations and the Impact of Sovereign Wealth Fund Investment

10,000 increase in contributions is associated with a reduction in the number of years accused executives are penalized with an officer ban (0.47 fewer years), probation (0.19 fewer years) and prison (0.32 fewer years), as well as the probability of receiving the harshest penalty from each agency (10%). Executives who personally contribute see similar effects. Results are robust to controlling for alternate reasons for disparate penalties (net benefit to shareholders and earned leniency), alternate discipline mechanisms (class action lawsuits, termination by the board, and firm delisting), and the level of discretion the agencies have in imposing penalties. We find some evidence to support a delay mechanism in criminal sanctions.

Is Sovereign Wealth Fund Investment Destabilizing

We examine the role of bilateral political relations in sovereign wealth fund (SWF) investment decisions. Our empirical results suggest that political relations play a role in SWF decision making. Contrary to predictions based on the FDI and political relations literature, we find that relative to nations in which they do not invest, SWFs prefer to invest in nations with which they have weaker political relations. Using a two-stage Cragg model, we find that political relations are an important factor in why SWFs invest but matter less in determining how much to invest. These results suggest that SWFs behave differently than other economic agents. Consistent with the FDI and political relations literature, we find that SWF investment has a positive (negative) impact for relatively closed (open) countries. Our results suggest that SWFs use - at least partially - non-financial motives in investment decisions.

Firm Size and the Impact of Securities Regulation

We investigate whether accusations by the popular press regarding the potential destabilizing force of sovereign wealth fund (SWF) investment have merit. SWF investments are associated with a reduction in the compensation of risk over the five-year term examined. Firm volatility decomposition suggests that it is mainly idiosyncratic risk that drives these impacts. Granger causality results suggest that SWFs are poorly informed in their investments (compared to the market) or they have nonfinancial motivations. There is no evidence that the media coverage precedes the poor performance. These findings suggest that SWF investment could be potentially destabilizing.

Does Foreign Portfolio Investment Reach Small Listed Firms

Using a newly-assembled dataset of 45,220 firms across 46 countries spanning the years 1996–2007, we find incongruent effects of regulation across firm size. We find that public enforcement facilitates small firm security issuance, while private enforcement benefits large firms more than small firms. However, once small firms access equity markets, private enforcement enhances the amount of equity capital raised in domestic markets. Stronger public enforcement gives rise to larger firms raising capital internationally. Comprehensively, results suggest that public (private) enforcement is more (less) consequential to firm-level access to capital than previously believed.

Do International Investors Enhance Private Firm Value

Using a unique dataset, the author examines the impact of foreign portfolio investment on the capital issuance behavior of small listed firms. The author finds that foreign portfolio investment is associated with an increased probability of small firm security issuance in all nations, regardless of property rights development. Evidence suggests the mechanism by which this occurs is a freeing up of capital in domestic markets when large firms utilize the foreign investment directly. Debt levels in nations where property rights are more developed increase, suggesting that foreign portfolio investment may reach small firms through the banking channel as well as capital markets in these nations.

Information Asymmetry and the Timing of Capital Issuance: An International Examination

We examine the impact of international venture capital investors on private firm success spanning 69 countries over the years 1995-2010. The data examined indicate that, relative to deals in which the investor base is purely domestic, private firms that have an international venture capital syndicate have a higher probability of exiting via IPO and higher IPO proceeds, as well as higher total deal M&A values. These relationships, however, depend on the level of internationalization and hence imply a tradeoff between the strategic benefits associated with international investors and the costs associated with geographic, cultural and legal differences across countries.

The Impact of Government Ownership on Entrepreneurial Exit

Using issuance data across 50 countries from 1996 through 2009, we examine the role of information asymmetry in market timing globally. We utilize a model that takes into account the possible feedback of security issues to past market returns allowing us to ascertain whether timing of capital issuance around the world is based on information asymmetry. We find evidence of both market timing and pseudo market timing. The evidence for (pseudo) market timing is (not) significantly stronger in international sub-samples with greater levels of information asymmetry when capital issuance is measured by (changes in equity) equity share. These results suggest that information asymmetry plays an important role in the ability of managers to time capital issuance and that counter to the implications of extant literature, market timing and pseudo market timing are not mutually exclusive, i.e., existence of one does not nullify the other.