Craig R. Everett

Group Membership, Relationship Banking and Loan Default Risk: The Case of Online Social Lending

This paper uses a new data source, online social lending (a.k.a. peer-to-peer lending), to help answer the question of what impact borrower-lender information asymmetries have on adverse selection, moral hazard and the hold-up problem. The hold-up problem refers to when lenders with private positive information do not pass long the savings associated with lower borrower risk to the borrower. The results indicate that the hold-up problem is more severe with private lenders than public lenders, and that personal relationships can mitigate the moral hazard problem. This data source has characteristics such as group membership that allow analysis of the public (outsider) versus private (insider) debt choice without some of the endogeneity issues that are present when using other data sources. Each loan contains detailed bidding information from both public and private investors. Thus, a clean distinction can be drawn between public and private debt without the potential problem of unobserved borrower risk characteristics.

A Theory of Entrepreneurial Overconfidence, Effort, and Firm Outcomes

We present a theory of entrepreneurial behavior that explores the relationship between overconfidence and successful firm outcomes, such as acquisition or IPO. In our model, increasing overconfidence produces two conflicting effects on the probability of a successful outcome: it not only induces an entrepreneur to increase the riskiness of a venture (which lowers the likelihood of successful exit), but also drives higher entrepreneurial effort, increasing likelihood of a successful exit. Due to this conflict, a kinked or U-shaped relationship may exist between overconfidence and positive outcomes. Furthermore, our model suggests that increased outside equity mitigates the effects of overconfidence.

How Do Small Businesses Pay for a Minimum Wage Increase

The impact of changes in the minimum wage on employment is a politically charged topic that has been researched extensively. This paper analyzes what small business owners intend to do in the short term to pay for such an increase in labor costs. Since there are multiple ways a business can compensate for an increase in labor costs in lieu of adjusting labor levels, our survey asks the business owners to rank a list of possible funding sources by likelihood. Using a sample of 1294 privately-held US firms over the period of May 10, 2014 to May 15, 2014, we find that small businesses respond differently to minimum wage hikes than large businesses and that small businesses plan to pay for minimum wage hikes using the following methods, in the following order: 1) increase prices to customers, 2) reduce hours, 3) layoffs, 4) reduce other costs, 5) reduce profits to owners/investors.

Small Business Financial Health Analysis

The Small Business Financial Health Project is a joint initiative of the Community Development divisions of the Federal Reserve Banks of Chicago and San Francisco, FundWell, Inc and Pepperdine University Private Capital Markets Project. The purpose of the project is to raise awareness about small business financial health, in order to highlight policies, investments, financial and technical assistance resources needed to help small businesses achieve their goals. This report presents the results and findings from a Financial Health Business Survey that was administered in 2013 and initiates a discussion around the factors that drive the sustainability and growth of small enterprises.

The Private Capital Access Index: Methodology and Implications

Starting in the first quarter of 2012, the Pepperdine Private Capital Markets Project has done a quarterly survey of private companies asking questions about the demand for and availability of external capital for their business. Through factor analysis, we have identified a subset of variables from this survey data that together represent the overall state of the world with respect to private companies’ demand for and access to capital. From this data and using factor analysis we construct two indices, scaled from zero to one hundred. The first, called the Private Capital Access (PCA) Index, reflects the current availability of capital to private firms. The second, the Private Capital Demand (PCD) Index, measures the current need for external capital by these same firms.