How Does Soft Information Affect External Firm Financing?

In recent years, there have been significant changes in the information environment facing firms. In particular, the explosive growth in computing power and the reduction in the costs of disseminating economically relevant information due to the widespread use of the internet have significantly enhanced the ability of investors to produce and transmit information useful for valuing firms’ equity and for evaluating firm’s financing and investment policies. To give one example, Several internet sites allow employees to rate a firm’s management, work culture, compensation schemes, and overall prospects, e.g., Glassdoor Employee Ratings. While it is difficult to argue that such ratings … Read more

Optimal Disclosure and Litigation Rules around IPOs and SEOs

In recent years, there have been a number of reforms to the legal and regulatory framework governing disclosures and litigation around initial public offerings (IPOs) and seasoned equity offerings (SEOs). The most prominent of these are the JOBS Act of 2012 and the Securities Offering Reform of 2005. In a recent paper, we develop a theoretical analysis of the optimality of allowing firms to disclose various kinds of information prior to IPOs and SEOs, and of alternative rules to govern private securities litigation. In our model, firm insiders, with private information about variables affecting their firm’s future performance, may make … Read more

How Venture Capital Improves the Market Value of Firms that Go Public

It is well established that venture capitalists can improve the product market value — the quality of projects and employees — at the private firms they invest in, either by making the firms more efficient (Chemmanur, Krishnan, and Nandy (2011)) or through monitoring (see, e.g., Gompers (1995) or Lerner (1995)). However, entrepreneurs and investors also talk about venture capitalists helping to create value for the firm in the financial market at the time the firm goes public. The channels through which such value is created, however, are less well-understood. In our new paper, available here, we explore a new … Read more