Three studies on institutional environment and the private equity continuum : from early-stage venture capital investments to buyouts

Abstract

This dissertation evaluates the effects of the institutional environment on investment and performance in the private equity industry. It provides insights on how trade secret protection can increase venture capital (VC) investment through a state court’s favorability toward the inevitable disclosure doctrine, the effect of anti-takeover regulation as it relates to private equity firm buyout performance, and the role that political context has in determining VC distributions to different states. Data analysis is based on Thomson Reuters’ VentureXpert for VC investment and geography, inevitable disclosure rulings gathered from multiple sources, a proprietary database on private equity firm buyout performance, and election results at the state and national levels of the United States. Three studies were conducted, which comprise this dissertation. The first paper investigates how inevitable disclosure, a form of trade secret protection, affects the geography of VC investment in the United States. Results show that a rule in favor of inevitable disclosure increases the overall amount of VC inflows and the proportion of investment by non-local VCs in a state more than an against or no rule. Mechanisms are addressed that can explain these findings by considering how a court decision on inevitable disclosure might increase the probability of obtaining a court injunction against a former employee departure and the predictability of that probability. The second paper extends experiential learning theory by arguing that the degree of causal ambiguity in firm decisions likely differs not only across different settings (i.e. operational vs. strategic), but also across different stages of the same strategic decision. With particular regard to acquisitions, the selection stage seems to be less causally ambiguous than the restructuring stage. Since experience translates into learning to a lesser extent when causal ambiguity is greater, acquisition experience translates more readily into learning to select than into learning to add value. Accordingly, results show that more experienced acquirers should perform better in scenarios when the focal acquisition is more selection (rather than restructuring) oriented, such as when (1) the educational background of the acquiring firm’s top management is more finance (rather than business) oriented; and (2) the information environment is less transparent. Results are largely consistent with the notion that correlation between acquisition experience and performance is more positive when the firm’s capacity to select target companies is more relevant. The third paper attempts to uncover the effects of political context, as it relates to VC distributions to different states across the United States. The primary finding is that VC investment distributions increase when states that elect a Republican governor also vote for a Democratic presidential candidate (regardless if that candidate wins). Additionally, as the stability of a Republican gubernatorial regime increases, VC investment decreases. Finally, results show that policies improving the quality of financial institutions might help explain the political effect (through the number of IPOs), whereas tax policy (through capital gains tax rate) and pro-entrepreneurship policy (through the number of new firms) do not.