In Chapter 1, I study the effect of limited attention on resource allocation by venture capitalists. Using engagement in the IPO process as a measure of distraction, I document that investments made by distracted venture capitalists into new portfolio companies tend to underperform in terms of their future financial success. Such companies are 7% less likely to go public or become acquired, and also exhibit lower exit multiples. The adverse effect of the attention constraints is present only in the vicinity of the distracting IPO and manifests itself both for individual partners and venture capital funds. Overall, the evidence indicates that the scarcity of attention hypothesis holds in the context of deal sourcing and screening in venture capital, highlighting the presence of skill in the company selection process.
In Chapter 2, I document that the private information disclosure shapes the choice of limited partners by venture capital firms. Following the court rulings in 2002-2003, public pensions and public university endowments disclose historical fund-level performance information. The response of venture capital firms to the disclosure was heterogeneous. Top-tier firms that tend to have oversubscribed funds exclude public institutions from their new funds compared to less successful and younger firms. Subsequently, domestic nonpublic institutional investors and foreign limited partners experience an increase in their capital commitments to top-tier venture capital firms. I find no evidence suggesting that the changes are driven by the unwillingness to disclose poor post-dotcom bubble returns. The reversal of the trend highlights the uncertainty over the scope of regulation as the primary reason behind the capital reallocations.
In Chapter 3, together with Christoph Herpfer and Roberto Steri we investigate the link between competition in credit markets and an important non-price term in lending, financial covenants. Using an exhaustive dataset covering the U.S. market for leveraged loans, we exploit a regulatory action as a plausibly exogenous reduction in the ability of regulated banks to offer loan contracts with lax covenant protection. As regulated banks demand relatively more covenants, borrowers switch to unregulated lenders, or shadow banks. As a consequence, the market share of regulated banks declined by roughly $30bn, to the advantage of the shadow banking system. This shift is not driven by a general drop in loan supply or change in other lending terms by regulated banks. Our results suggest the necessity to internalize the effects of non-price competition between the regulated and the non-regulated sectors in regulatory decision making.