Feng Zhan

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.

High Frequency Trading and End-of-Day Manipulation

We examine the impact of higher frequency trading on the frequency and severity of suspected end of day price dislocation cases in 22 stock exchanges around the world over the period January 2003-June 2011. Controlling for country, market, legal and other differences across exchanges and over time, and using a variety of robustness checks including difference-in-differences tests, we show that the presence of high frequency trading in some market has significantly mitigated the frequency and severity of end-of-day manipulation, counter to recent concerns expressed in the media. The effect of HFT is more pronounced than the role of trading rules, surveillance, enforcement and legal conditions in curtailing the frequency and severity of end-of-day manipulation.

Corporate Finance and the Governance Implications of Removing Government Support Programs

Governments worldwide spend trillions of dollars on business support programs. This article examines the implications to investors of phasing out one of these subsidy programs. Our setting takes advantage of a unique quasi-natural experiment, where tax subsidies for Canadian Labour-Sponsored Venture Capital Corporations (LSVCCs) were phased out in one province but not in others. Using a difference-in-differences setting, we show that fund performance — unrelated to the tax credit — decreased substantially following the enactment of the phase-out. We further show empirically that LSVCC managers continued to charge venture capital-like management fees, despite the fact that their investment strategies become more similar to mutual funds. Our data strongly support the idea that investors in companies and/or funds that unexpectedly lose government support face significant financial costs.

China: From Imitator to Innovator?

For a long time, China was viewed as the worlds “workbench,” rather than as a global innovator. However, recently, China undertook significant efforts to transform towards a research and innovation orientation, by, e.g., setting research goals in its 12th Five-Year Plan that established a Chinese National Patent Development Strategy. In this paper, we examine the effects of that government policy change and assess how it has impacted firm innovation. To address potential endogeneity concerns, we use the policy change as a quasi-natural experiment, and explain the exogenously caused variations. We also use a “difference-in-differences” approach to, e.g., propensity score matched U.S. peers, and find that the policy change had a positive effect on Chinese firms’ research spending, as measured by research intensity. We also show that Chinese firms increased their research spending in response to the strategic shift by the government in 2008, relatively outpacing their U.S. peers during the same time period. However, Chinese companies have not yet overtaken their U.S. peers. Rather, they have reduced the gaps between them.

Individualism, Synchronized Stock Price Movements, and Stock Market Volatility

This paper examines the impact of national culture on herding behaviour across international financial markets. The relation between national culture and investor behaviour, and how it impacts overall market volatility is studied by examining synchronized stock price movements and stock market volatility in 47 countries around the world over the period of January 2003 to May 2012. I find that nations with lower values of individualistic culture are more likely to have a higher number of synchronized stock price movements. Further, the correlation between stock price movements apparently increase stock market volatility. Nations with high individualistic culture have a lower number of synchronized stock price movements and thus have lower levels of stock market volatility. The positive relationship between synchronized stock price movements and stock market volatility is stronger for emerging markets during the financial crisis from June 2007 to December 2008. Rather than due to the different levels of economic development, the empirical results here indicate that a portion of the difference in market level volatility is attributed to the investor bias of different cultures.