Denis Schweizer

Signaling in Equity Crowdfunding

This paper presents a first–ever empirical examination of the effectiveness of signals that entrepreneurs use to induce (small) investors to commit financial resources in an equity crowdfunding context. We examine the impact of venture quality (human capital, social [alliance] capital, and intellectual capital) and uncertainty on fundraising success. Our data highlight that retaining equity and providing more detailed information about risks can be interpreted as effective signals and can therefore strongly impact the probability of funding success. Social capital and intellectual capital, by contrast, have little or no impact on funding success. We discuss the implications of our results for theory, future research, and practice.

Strategic Asset Allocation and the Role of Alternative Investments

This paper introduces a new framework for strategic asset allocation with alternative investments (buyouts, commodities, hedge funds, REITs, and venture capital). Our approach is not based on a utility function, but on an easily quantifiable risk preference parameter, λ. We account for higher moments of the return distributions within our optimization framework and approximate best-fit distributions. Thus, we replace the empirical return distributions, which are often skewed and/or exhibit excess kurtosis, with two normal distributions. We then use the estimated return distributions in the strategic asset allocation. Our results show in various out-of-sample analyses that our framework yields superior results compared to the Markowitz framework. Furthermore, our framework better manages regime switches, which tend to occur frequently during crises. To test our results for stability and robustness, we use, among other things time-varying correlation structures in the return distributions and weight restrictions for the asset classes.

The Fast Track IPO – Success Factors for Taking Firms Public with SPACs

Special Purpose Acquisition Companies (SPACs) are shells initiated with the sole intent of acquiring a single privately held company. SPAC shareholders vote on this acquisition, and in this paper we identify the factors that affect approval probability. Surprisingly, the data indicate more experienced managers and boards do not enhance the probability of deal approval. Similarly, glamor underwriters and larger underwriter syndicates are less likely to be associated with successful SPACs. Further, we find a negative relation between the presence of active investor (hedge funds and private equity funds) shareholdings in a SPAC and approval probability.

Private Equity Benchmarks and Portfolio Optimization

Portfolio optimization using private equity is typically based on one of three indices: listed private equity, transaction-based private equity, or appraisal value-based private equity indices. However, we show that none of these indices is fully suitable for portfolio optimization. We introduce here a new benchmark index for venture capital and buyouts, which is updated monthly, adjusted for autocorrelation (de-smoothing), and available contemporaneously. We illustrate how our benchmark enables superior quantitative portfolio optimization.

The Changing Latitude: Labor-Sponsored Venture Capital Corporations in Canada: The Changing Latitude: LSVCCs in Canada

Manuscript Type. Empirical. Research Question/Issue. This paper seeks to understand the role corporate governance and government policy plays in the portfolio choices of the labor�?sponsored venture capital corporations (LSVCCs) in Canada. We investigate whether or not the change in tax policy announced in Ontario (2005) had an impact on the investment behavior of Ontario LSVCCs and whether the unique corporate governance structure of LSVCCs enables them to focus on their investment mandate subsequent to this announcement. Research Findings/Insights. Our findings suggest that LSVCCs in Ontario are more likely to include public companies in their fund portfolios after the announcement of the change in tax policy. We find that after 2005, LSVCCs have increased their number of investments in public companies by 59.13 percent and in turn decreased their number of investments in private companies by 13.17 percent. On the other hand, we find no significant changes in investment behavior for LSVCCs in other provinces. In terms of the percentage of total investment in public companies, we find that the LSVCCs in Ontario are more likely to increase their total investment in public companies by 50 percent and to decrease their investment in the short term by 46.43 percent. LSVCCs in other provinces, however, are reducing their percentage of investment in public companies by 58.33 percent and increasing their total investment in private entrepreneurial firms by 38.33 percent in the same period. Theoretical/Academic Implications. With a hand�?collected proprietary dataset, we are able to augment existing studies on the unique structure of LSVCCs in Canada with empirical evidence on the style drift due to the changes in government tax policy. We compare and contrast the investment behavior of LSVCCs before and after the tax policy change in Ontario as well as the investment behavior of LSVCCs in other provinces. We hypothesize that as a result of the elimination of the tax credits, the removal of certain investment restrictions, and weaker corporate governance, LSVCCs have drifted from their original mandate to invest in high�?risk venture companies to investing in less risky public companies. Such style drift may be a result of LSVCCs preparing for potential wealth transfer or liquidation by retail investors. More importantly, we find the unique corporate governance structure of LSVCCs may facilitate this drift from their original purpose of providing venture capital to small and medium�?sized entrepreneurial (SME) firms. Practitioner/Policy Implications. We highlight that the style drift of LSVCCs in Ontario may result in such funds behaving more like other types of mutual funds and the deviation from their original mandate to provide venture capital may not only prove detrimental to entrepreneurial investee firms seeking such capital, but also negate any diversification benefits sought by fund investors. Also, such deviation may not necessarily justify the higher management expense ratio charged by LSVCCs.

Intra-Industry Effects of Shareholder Activism in Germany - Is There a Difference between Hedge Fund and Private Equity Investments?

We investigate the valuation effects of industry rivals on german firms targeted by hedge funds and private equity investors. We argue that both types of investors differ from other blockholders due to their strong motivation and ability to actively engage and monitor. We find that the announcement of a change in ownership structure generates statistically significant short- and long-term intra-industry effects for rivals to the respective private equity and hedge fund targets. however, these effects differ markedly between hedge fund investments and private equity investments. We conclude that hedge funds are more aggressive than private equity investors in implementing a shareholder orientation.

Do Markets Anticipate Capital Structure Decisions? Feedback Effects in Equity Liquidity

We analyze the impact of expected (targeted) capital structure decisions on information asymmetries. We measure information asymmetry from equity liquidity through the use of an information asymmetry index that is based on six measures that capture trading activity, trading costs, and the price impact of order flow. Modeling the joint determination of leverage and liquidity, the data indicate that expected increases in leverage (target leverage changes) decrease the information asymmetry index. This is consistent with the signaling hypothesis of Ross (1977), and is equivalent to increases in equity liquidity.

Are Private Equity Investors Boon or Bane for an Economy? - A Theoretical Analysis

In this paper, we provide a theoretical foundation for the controversial debate on the investment behaviour of private equity investors. We separately consider six major characteristics that typically distinguish private equity investors from standard investors. Applying a simple model framework, we compare both the maximum acquisition prices paid by private equity and standard investors for the takeover of a target firm, as well as the subsequent optimal investment volumes. This analysis intends to uncover why private equity investors do (or do not) acquire a company even though they later invest less than standard investors would. We find that most of the usual arguments against private equity transactions, such as higher target return, short‐term investment perspective, lower risk aversion, and operational improvements, cannot explain lower investment volume following a successful takeover by private equity firms, in contrast to other arguments, such as high level of leverage and informational advantages.

Is Corporate Governance in China Related to Performance Persistence

This paper examines the relationship between performance persistence and corporate governance (proxied by board characteristics and shareholder structure). We document systematic differences in performance persistence across listed companies in China during 2001-2011, and empirically demonstrate that firms with higher corporate governance (especially for board characteristics) show higher performance persistence. The results are stronger for short horizons and for an accounting-based view. Overall, our empirical findings, although not being able to completely exclude other explanations, strongly suggest that a well-structured board with more independent directors, split positions for CEOs and the chairman as well as smaller boards favors performance persistence. In terms of the shareholder structure we find evidence that lower levels of State ownership and a nonconcentrated blockholder structure is positively associated with performance persistence.

Strategic Asset Allocation and the Role of Alternative Investments: Strategic Asset Allocation and the Role of Alternative Investments

We introduce a framework for strategic asset allocation with alternative investments. Our framework uses a quantifiable risk preference parameter, λ, instead of a utility function. We account for higher moments of the return distributions and approximate best-fit distributions. Thus, we replace the empirical return distributions with two normal distributions. We then use these in the strategic asset allocation. Our framework yields better results than Markowitzs framework. Furthermore, our framework better manages regime switches that occur during crises. To test the robustness of our results, we use a battery of robustness checks and find stable results.