Gilles Chemla

Corporate Venturing, allocation of talent, and competition for star managers

We provide new rationales for corporate venturing (CV), based on competition for talented managers. As returns to venturing increase, firms engage in CV for reasons other than capturing these returns. First, higher venturing returns increase managerial compensation, to which firms respond by increasing the power of incentives. Managers increase effort, prompting firms to reallocate them to new ventures, where the marginal product of effort is highest. Second, as returns to venturing become large, CV emerges as a way to recruit/retain managers who would otherwise choose alternative employment. We derive several testable empirical predictions about the determinants and structure of CV.We consider the motives for a firm to engage in corporate venturing. We argue that in case of failure of a new venture, corporate venture capitalists (CVC) have a strategic advantage relative to traditional venture capitalists (VC) in creating rents after rehiring or refinancing the entrepreneurs. Hence, corporate venturing induces the would-be entrepreneur to exert an effort that is higher than within the corporation, but lower than under traditional venture capital financing. Ceteris paribus, the entrepreneur ends up with fewer shares and less control under CVC financing than under traditional VC financing. Competition from venture capitalists increases corporate venturing activity, the salaries of potential entrepreneurs, and total economic output. Our results are consistent with the observed pro-cyclicality of corporate venture capital activity with venture capital activity.

Hold-Up, Stakeholders, and Takeover Threats

We analyze the impact of takeover threats on long term relationships between the target owners and other stakeholders. In the absence of takeovers, stakeholders’ bargaining power increases their incentive to invest but reduces the owners’ incentive to invest. The threat of a takeover that would transfer value from the stakeholders reduces their ex ante investment. However, the stakeholders may appropriate ex post some value created by a takeover. This can prevent some value-enhancing takeovers. We examine extensions to the disciplinary role of takeovers, takeover defence mechanisms, and trade credit, and discuss empirical predictions.

The Determinants of Investment in Private Equity and Venture Capital: Evidence from American and Canadian Pension Funds

This paper provides a comparative analysis of pension plan allocations to private equity and to venture capital in the United States and in Canada. Although the assets of American funds in our data are worth 10 times those of Canadian funds, their investment in private equity is about 20 times larger. In both countries, asset size is an important determinant of both the decision to invest in private equity and of how much to invest in that asset class. However, asset size does not appear as a significant determinant of investment in venture capital. The difference in pension fund asset sizes appears to explain well the differences in the decision to invest in private equity, but it is not sufficient to explain the differences in the amount invested in this type of assets. We examine other possible explanatory factors, such as geographical location, the institutional environment, and regulatory constraints.

Dynamic adverse selection and debt

This paper argues that the strategic use of debt favours the revelation of information in dynamic adverse selection problems. Our argument is based on the idea that debt is a credible commitment to end long term relationships. Consequently, debt encourages a privately informed party to disclose its information at early stages of a relationship. We illustrate our point with the financing decision of a monopolist selling a good to a buyer whose valuation is private information. A high level of (renegotiable) debt, by increasing the scope for liquidation, may induce the high valuation buyer to buy early at a high price and thus increase the monopolists expected payoff. By affecting the buyers strategy, it may reduce the probability of excessive liquidation. We investigate the consequences of good durability and we examine the way debt may alleviate the ratchet effect.

Skin in the Game and Moral Hazard

What determines securitization levels, and should they be regulated? To address these questions we develop a model where originators can exert unobservable effort to increase expected asset quality, subsequently having private information regarding quality when selling ABS to rational investors. Absent regulation, originators may signal positive information via junior retentions or commonly adopt low retentions if funding value and price informativeness are high. Effort incentives are below first-best absent regulation. Optimal regulation promoting originator effort entails a menu of junior retentions or one junior retention with size decreasing in price informativeness. Zero retentions and opacity are optimal among regulations inducing zero effort.

Pension Fund Investment in Private Equity and Venture Capital in the U.S. and Canada

This article provides a comparative analysis of pension plan allocations to private equity and to venture capital in the United States and in Canada. Although the assets of American funds in our data are worth 10 times those of Canadian funds, their investment in private equity is about 20 times larger. Asset size is an important determinant of the decision to invest in private equity in both countries, but it is only a determinant of how much to invest in Canada. Asset size appears to be an important factor in explaining the difference in private equity investment, but it is not sufficient to explain it in its entirety. We examine other possible explanatory factors, such as fund types and location, the institutional environment, and regulatory constraints.

Takeovers and the Dynamics of Information Flows

This Paper analyses the effect of a possible takeover on information flows and on the terms of trade in business relationships. We consider a long-term relationship between a firm and a privately-informed stakeholder, a buyer for example. In our model, takeovers both increase the surplus from trade and enable the firm to extract a potentially higher share of the surplus from the buyer. The possibility of a takeover that leaves the buyer with a higher (lower) rent than the incumbent manager increases (decreases) the buyers willingness to reveal their valuation. We suggest a number of testable predictions on the performance of takeover targets and trade credit.

The Paradox of Policy-Relevant Natural Experiments

Conventional wisdom holds that natural experiments represent especially credible bases for econometric inference facilitating evidence-based policymaking. We illustrate the fragility of policy-relevant evidence generated by first-stage randomizations by way of parable economies. In the first (second) economy, the econometric analysis is relevant (irrelevant) as the government is able (powerless) to alter policy in the future. In the first economy, but not the second, econometric evidence is contaminated by endogeneity after-the-fact, with treatment responses contingent upon (unknown) parameters of the government objective function into which the empirical estimates will be fed. We have the following paradox: The irrelevant natural experiment is bias-free, while the relevant experiment is biased after-the-fact. Extending this argument, we show a perceived-credible natural experiment is biased by Hawthorne Effects while a perceived-non-credible experiment is not. Importantly, since we consider measure zero experimental subjects, the Hawthorne Effects we illustrate must be understood as arising from rational expectations as distinct from behavioral motives posited in the psychology literatures.

Labor Intensity and Expected Stock Returns

This paper analyses the effects of labor intensity on a firms operating risk and its expected stock returns. We isolate a pure labor intensity effect by using a relative measure with respect to the three-digit industry median level. We show that labor intensity is positively associated with operating leverage, at least in the small and medium-sized firms sub sample. Stock and portfolio returns of small and, to a lesser extent, mid cap firms are positively associated with labor intensity after controlling for traditional risk factors. In particular, the labor-induced operating leverage does not seem to be explained by the book-to-market factor. The relationship between labor intensity and stock returns is stronger in low wage industries and at medium levels of financial leverage.

Subject Rational Expectations Will Contaminate Randomized Controlled Medical Trials

Double-blind RCTs are viewed as the gold standard in eliminating placebo effects and identifying non-placebo physiological effects. Expectancy theory posits that subjects have better present health in response to better expected future health. We show that if subjects Bayesian update about efficacy based upon physiological responses during a single-stage RCT, expected placebo effects are generally unequal across treatment and control groups. Thus, the difference between mean health across treatment and control groups is a biased estimator of the mean non-placebo physiological effect. RCTs featuring low treatment probabilities are robust: Bias approaches zero as the treated group measure approaches zero.