Kate Litvak

Governance Through Exit: Default Penalties and Walkaway Options in Venture Capital Partnership Agreements

When investors sign venture capital partnership agreements, they do not immediately turn over the entire committed capital. Instead, they contribute capital in stages, as needed by the fund. Typically, investors have at least three years to decide whether to honor their commitment obligations fully. To discourage investor defaults, venture funds employ a complicated system of financial penalties. Since venture funds could have eliminated the default problem altogether by demanding the contribution of the entire amount upfront, the question arises: why do venture funds engage into this elaborate staging scheme? I suggest that staged contributions are used as a governance tool: the threat of investor walkaway creates additional incentives for venture capitalists to perform well. The walkaway right, however, comes at a cost of undermining a funds liquidity and threatening its ability to make investments in a timely fashion. Thus, my hypothesis predicts that the strength of investor walkaway right represents a tradeoff between governance concerns and liquidity concerns. I test this hypothesis by studying venture capital partnership agreements. I find that the strength of investor walkaway right is strongly and positively related to several measures of expected agency costs. Venture funds where managerial compensation is riskier and more heavily tilted toward performance-based component make capital withdrawals more difficult. Larger venture funds (typically run by more prominent managers, who generate fewer mismanagement concerns) give investors weaker walkaway rights.

The Relationship Among U.S. Securities Laws, Cross-Listing Premia, and Trading Volumes

This paper studies the relationship among the U.S. securities laws, the premia that non-U.S. firms obtain by subjecting themselves to U.S. laws, overall U.S. share prices, and a cross-listed firm’s U.S. trading volume. I report three main sets of findings. First, for exchange-traded (NYSE and NASDAQ) cross-listed firms, pair premia and pair returns (premia and returns not explained by valuation and returns for similar non-cross-listed firms from the same home country) are strongly correlated with U.S. stock indices. There is a visually apparent “bubble” in pair premia for these firms, which peaks in early 2000, at the same time as U.S. stock indices. In contrast, pair premia and pair returns for cross-listed firms traded OTC or on PORTAL are not correlated with U.S. indices. The correlation between pair returns and U.S. indices only exists for firms with an above-median ratio of U.S.-based to total trading volume, and is triggered by cross-listing; there is no significant correlation before listing. Second, pair premia for level-23 firms, relative to premia for level-14 firms (“relative pair premia”), exist only in firms with above-median ratio of U.S. to total trading volume. Firms with below-median ratio of U.S. trading have no relative pair premia, regardless of listing level. Third, there are important time variations in relative pair premia. Relative pair premia decline significantly for all firms during the first 6 years after listing, and disappear after year six. The decay is most pronounced for firms with below-median ratio of U.S. trading volume. These results, taken together, weaken the law-based explanation for cross-listing premia (bonding to U.S. securities regime) and strengthen the non-law-based explanations (liquidity and visibility). They also suggest a behavioral explanation: U.S. investors treat high trading volume, exchange traded firms partly like U.S. firms, but treat OTC firm, Portal firms and low-trading-volume exchange-traded firms like other foreign firms.

The role of political competition and bargaining in Russian foreign policy: The case of Russian policy toward Moldova

Abstract Recent discussions about Russian foreign policy have generally concentrated on its shift to the right. Along with numerous Western observers, who interpret Russian international behavior as a single-player activity, the Russian foreign minister Andrei Kozyrev has himself attempted to portray his policy in terms of realist theory. Answering numerous accusations on “embracing some policies that [he] once spoke out against” (Rafael et al., 1994), Kozyrev paints an explicit picture of a strategic response by his ministry to objective world conditions. However, analysis shows that world conditions played a very small role in shaping Russian foreign policy.

The Long-Term Effect of Health Insurance on Near-Elderly Health and Mortality

We use the best available longitudinal data set, the Health and Retirement Study, and a battery of causal inference methods to provide both central estimates and bounds for the long-term effect of health insurance on health and mortality among the near-elderly (initial age 50–61) over a 20-year period. Compared with matched insured persons, those uninsured in 1992 consume fewer health-care services, but their health (while alive) does not deteriorate relative to the insured, and, in our central estimates, they do not die significantly faster than the insured. Our upper and lower bounds suggest that prior studies have greatly overestimated the health and mortality benefits of providing health insurance to the uninsured.

Which Limited Partners Limit VC Opportunism

We examine the response of different types of Limited Partners (LPs) to alleged opportunistic behavior on the part of Venture Capitalists (VCs). We use a sample of litigated VCs (identified by Atanasov, et al, 2012, Journal of Finance) to proxy for VC opportunistic behavior. Based on their presumed sensitivity to VC malfeasance and headline risk, we predict that university endowments and economic development authorities will be most likely to respond negatively to potential bad press. To test our hypothesis, we employ differences-in-differences (DiD) analysis and compare the participation of different types of LPs in VC funds before and after litigation relative to the LPs of otherwise similar, matched VCs that are not subject to litigation. We find that endowments reduce by more than 50% their participation in follow-on investment funds offered by litigated VCs relative to other types of LPs. Our results suggest that the threat of university endowment withdrawal of funding can deter VC opportunism.

The Effect of Health Insurance on Near-Elderly Health and Mortality

We use the best available longitudinal dataset, the Health and Retirement Survey, and a battery of causal inference methods to provide both central estimates and bounds on the effect of health insurance on health and mortality among the near elderly (initial age 50-61) over an 18-year period. Those uninsured in 1992 consume fewer healthcare services, but are not less healthy and, in our central estimates, do not die sooner than their insured counterparts. We discuss why a zero average effect of uninsurance on mortality and health is plausible, some selection effects that might explain our full results, and methodological concerns with prior studies. The Appendix that accompanies this article is available on SSRN at http://ssrn.com/abstract=2758692.