Exam (New)

Question 1

What argues Jensen about? (Jensen, 1989)

Answer 1

Jensen argues that public companies were/are facing significant challenges and experiencing a decline in their influence and effectiveness.

Question 2

Which are the four factors Jensen discusses contributing to the decline? (Jensen, 1989)

Answer 2

Changing ownership structure: Jensen pointed out that the ownership of public corporations was becoming more dispersed, with individual shareholders holding smaller stakes. This dispersion made it difficult for shareholders to effectively monitor and influence the management of these corporations.

Agency problems: Public corporations often face agency problems, where managers may pursue their own interests instead of maximizing shareholder value. Jensen emphasized the need for effective corporate governance mechanisms to align the interests of managers and shareholders.

Lack of market discipline: Jensen argued that market forces were not exerting sufficient discipline on public corporations. He suggested that hostile takeovers, which act as a market discipline mechanism, were becoming less common due to regulatory changes and defensive strategies adopted by target firms.

Rise of alternative forms of organization: Jensen observed the emergence of alternative organizational forms, such as leveraged buyouts, joint ventures, and private equity, which were seen as more efficient and effective than public corporations in certain contexts.

Question 3

What are some specific ways in which the new organizations can motivate people and manage resources more effectively than public corporations? (Jensen, 1989) - Three key take-aways

Answer 3

1. The new organizations use debt, rather than equity, as their major source of capital. This reduces the amount of free cash flow available for managers to waste and aligns the interests of owners and managers more closely.
2. The new organizations have a strong emphasis on cash flow, rather than earnings per share. This encourages managers to focus on generating cash and investing in profitable projects that benefit shareholders.
3. The new organizations often have a higher degree of ownership concentration, with a small number of investors holding a large percentage of the company’s shares. This can lead to better monitoring and accountability by owners over managers.

Question 4

Kaplan & Schoar (2005) findings? 4 parts

Answer 4

1. Kaplan and Schoar find that average fund return is lower than the S&P 500 (net of fees) Gross of fees is higher return for VC/PE. Better performing partnerships are more likely to raise follow-on funds and larger funds. At industry level, fund performance is procyclical.
2. LBO funds’ return net of fees is slightly less than those of the S&P 500, VC funds lower on an equal-weighted basis, but higher on a capital weighted basis.
3. Persistence among fund performance
4. Fund flows are positively related to past performance. New partnerships are more likely to start in periods after the industry has performed especially well. Funds that are raised in boom times are less likely to raise follow-on funds. Fund size, decreasing returns to scale.

Question 5

What does Kaiser & Westarp (2010) argue about in their article? (Value creation)

Answer 5

They discuss the PE and VC industry, including different types of firms, their investment strategies and how they create value. The articles also explores challenges and risks associated with PE and VC investing such as difficulty of accurately measuring risk-adjusted returns and the potential conflicts of interest between investors and portfolio companies. Additionally, the article examines various factors that can affect the success of PE and VC investments, such as market conditions, regulatory changes and technological innovation.

Question 6

How do market entry and fund performance in the private equity industry differ from those in mutual funds, and what implications do these differences have for investors? (Kaplan & Schoar 2005)

Answer 6

Market entry and fund performance in the private equity industry are procyclical, meaning they are influenced by economic cycles. However, established funds are less sensitive to cycles than new entrants. The paper notes that several of these results differ markedly from those for mutual funds. The implications of these differences for investors are not explicitly discussed in this paper.

Question 7

What are some of the techniques used by private equity firms and how has the PE industry changed over time? (Gordon 2012)

Answer 7

Private equity firms use various techniques such as venture capital, distressed situations, leveraged buyouts, and others.

The private equity industry has evolved over time since its inception in the mid-20th century. While scandals have made headlines, the vast majority of private equity firms have been involved in no scandal at all. Private equity and venture-capital firms have helped fund the technological revolution unleashed by the microprocessor.

Question 8

What does Merton explore in his article? (Merton 2005)

Answer 8

Merton explores the design and functioning of financial systems, focusing on the interplay between their function and structure. The article emphasises the importance of aligning the objectives and functions of financial systems with their underlying structure to achieve efficiency and stability.

Merton & Bodie (2005) put large emphasis on the high-pace innovation rate within the financial system, which they depict as the financial innovation spiral. This is moreover explained by the emergence of new technologies that subsequently decreases transaction costs, which combined, thus have intensified the competition within the financial system.

Question 9

What evidence based on real effects on buyouts did Kaiser and Westarp(2010) find?

Answer 9

Enchaned productivity.

• Factor productivity in manufacturing plants: increased productivity - same input but more output.
• Employment of non-production went down
  R&D (kommer minska, ej main finding)
  Better employment conditions

Question 10

What accounting measures of performance of buyouts did Kaiser & Westarp (2010) find?

Answer 10

• Enchanced focus on cash flow
• Decreased working capital
• Capex to sales decreased

Question 11

In the article of Merton (2005) the authors highlights three interplays between function and structure, what are they? (Financial systems)

Answer 11

Risk sharing and allocation: Financial systems facilitate the allocation of risks among various economic agents, enabling individuals and businesses to manage and transfer risks. This function is critical for promoting economic growth and stability.

Information production and dissemination: Financial systems generate and disseminate information about investment opportunities, risks, and returns. Efficient information flow is vital for proper pricing and allocation of capital.

Liquidity provision: Financial systems provide liquidity, allowing individuals and institutions to access funds when needed. Liquidity plays a crucial role in enhancing the efficiency of financial transactions and promoting economic activity.

Question 12

What evidence on value creation of VC firms did Kaiser & Western (2010) find? ( 2 positive + 1 cost of VC involvement)

Answer 12

• Monitoring: board of directors, incentivized-enhanced contracts, aligned interests through employee options
• Active involvement: build up internal organization, professionalize the organization HR policies, marketing and sales staff.
• Costs: VC backed companies are underpricing in IPO to encourage investors to buy the IPO.

Question 13

What are some of the key factors that contribute to value creation in the PE and VC industry (what does the VC and PE firm contribute with)?
(Kaiser & Westarp 2010)

Answer 13

• Selecting right companies to invest in.
• Providing operational support and strategic guidance.
• Often well-established VC and PE firms have a strong network within the industry to further make the investment a success.

There are several ways in which private equity and venture capital firms can create value in their investment activities. These include selecting the right companies to invest in, structuring deals effectively, providing operational support and strategic guidance to portfolio companies, and exiting investments at the right time and price. Additionally, successful private equity and venture capital firms tend to have strong networks and relationships within their industries, which can help them identify promising investment opportunities and add value to their portfolio companies. Add value from capital structure.

Question 14

What is the difference between a functional approach and an institutional approach to financial system design? (Merton, 2005)

Answer 14

A functional approach to financial system design focuses on financial functions as the “anchors” of such systems. In contrast, an institutional approach to financial system design focuses on the institutions themselves as the key components of such systems. The authors argue that a functional approach can offer insights into the development and evolution of financial systems over time, with changes in institutional structure driven by changes in underlying financial functions.

Question 15

How do PE and VC firms differ in their approaches to value creation?
(Kaiser & Westarp 2010)

Answer 15

Private equity firms tend to focus on investing in established companies with a proven track record, and they often take a more hands-on approach to managing their portfolio companies. They may bring in new management teams or implement operational changes to improve the company’s performance. In contrast, venture capital firms typically invest in early-stage companies with high growth potential, and they may provide more strategic guidance and support rather than direct operational involvement. Additionally, venture capital firms often have a longer investment horizon than private equity firms, as it can take several years for early-stage companies to reach maturity and become profitable. VC firms can attract key employees through its network.

Question 16

What is the article from Gans about? (2005) Patents

Answer 16

Joshua S. Gans and Scott Stern explore the conditions necessary for a market for ideas or technology to operate efficiently. They also discuss the challenges that inhibit the allocative efficiency of market for ideas and technology (MfTs) and identify key institutional developments that suggest effective market design may be possible for some innovation markets.

Question 17

What does the article from Boldrin and Levine (2005) say?

Answer 17

In this article the authors discuss why patents shouldn’t exist and come to the conclusion that patents and copyrights should be terminated.

Question 18

Gans (2005) mention two types of different markets, which are they and explain the inputs?

Answer 18

To design an effective market, Gans talks about market desgin and market for technology.

Market design:

Market thickness (idea complementary): both buyers and sellers have opportunities to trade with a wide range of potential transactors.

Lack of congestion (value rivalry): speed of transactions is sufficiently rapid to ensure market clearing but slow enough so that individuals have the opportunity to seek other opportunities. (ex finns bara två hus på marknaden som skall säljas exakt samtidigt, du kan bara gå på en visning utan att veta om du valt rätt) .

Market safety (user reproducibility): No incentives for misrepresentation.

Market for Technology

1. Idea complementary (Market thickness) → ideas are normally in need of highly specific complementary assets in place and ideas to maximize value.
2. Value rivalry (Lack of congestion) → even if ideas may be non-rivalrous in use, the value of utilizing an idea may decline if utilized by others
3. User reproducibility (market safety) → often difficult for sellers to estimate the value due to the fact that ideas can be reproduced at pretty much zero marginal costs (Romer, 1990) if weak IP protection. (minskas medhjälp av patent)

The solution is PATENTS!! (If it should become closer to a market).

Question 19

What are some of the arguments they use when whey state that patents shouldn’t exist? (Boldrin and Levine 2005) 4 take-aways

Answer 19

• First-Mover advantages, short-term monopoly.
• Sequential innovation: granting monopoly on newly created ideas raised the cost of future new ideas
• Rent-seeking: When governments give away monopolies, there is incentive for would-be monopolists to waste resources competing for the award, i.e. patent race.
• Optimal duration of IP: monopolies should be limited in time, as the market expand through economic growth and trade, these limits should be gradually tightened, until eventually no grants are necessary.

Question 20

How do institutional developments like “formalized IP exchanges” impact the efficiency of the market for ideas? (Boldrin 2005)

Answer 20

These exchanges can help facilitate the exchange of ideas and technologies by providing a platform for buyers and sellers to negotiate and transact. By creating a more efficient market, formalized IP exchanges can help increase the allocative efficiency of MfT. However, it is important to note that the impact of such institutions on MfT efficiency may depend on other factors such as the nature of the ideas being exchanged and the norms and values of society.

Question 21

What are some of the pitfalls of existing institutions for promoting innovation? (Boldrin and Levine 2005)

Answer 21

From a normative perspective, the authors of the document suggest that existing institutions for promoting innovation, such as patents and copyrights, have several pitfalls. They argue that these institutions create monopolies on ideas or inventions, which can stifle innovation by preventing others from building upon or improving the original idea. They also suggest that these monopolies can lead to higher prices for consumers and reduce access to new technologies and medicines. Additionally, they argue that government grants of monopoly through patents and copyright are not the only way to incentivize innovation and that alternative ways should be explored.

Question 22

What is Hart (2001) saying in his article “Financial contracting”?

Answer 22

Hart discusses various factors that influence financial contracting, such as information asymmetry and moral hazard. He also examines how financial contracting affects economic growth and stability, and provides examples of successful financial contracting strategies in different industries. Overall, the article highlights the importance of effective financial contracting in promoting economic efficiency and growth.

Incentive problems, decision and control rights ( EBIT fall below threshold VC take over)

Question 23

Can you provide examples of alternative ways to incentivize innovation besides patents and copyright? (Boldrin & Levine 2005)

Answer 23

The authors of the document suggest that alternative ways to incentivize innovation include subsidies, prizes, and monopoly regulated through mandatory licensing. Subsidies can be used to provide financial support to firms or individuals engaged in research and development. Prizes can be awarded to those who achieve a specific goal or milestone, such as developing a new drug or technology. Monopoly regulated through mandatory licensing involves granting a temporary monopoly to an inventor or firm but requiring them to license their technology or invention to others at a reasonable price. These alternatives are suggested as more efficient mechanisms for incentivizing innovation than patents and copyrights.

Question 24

What does Kaplan & Strömberg (2002) study?

Answer 24

The article studies contracts between VCs and entrepreneurs. The distinguishing characteristic of VC financings is that they allow VCs to separately allocate cash flow rights, board rights, voting rights, liquidation rights and other control rights. These rights are contingent on observable measures of financial and non-financial performance. If the company performs badly, VC gets full control, this generally applies for board rights, voting rights and liquidation rights.

Question 25

Kaplan & Strömberg’s (2002) result have 4 implications, which?

Answer 25

1. Cash flow rights, the entrepreneur’s equity compensation function is more sensitive to performance when incentive and asymmetric information are more severe. This is consistent with principal-agent theories.
2. Allocation of control rights, hard to make the contract complete.
3. Cash flow rights and control rights are contingent on observable and verifiable measures of performance.
4. Non-compete and vesting provisions indicate that VCs care about the hold-up problem.

Question 26

What are some of the key factors that influence financial contracting? (Hart,2001)

Answer 26

According to Oliver Hart’s article on Financial Contracting, some of the key factors that influence financial contracting include information asymmetry, moral hazard, and adverse selection.

Question 27

What are some key findings from the empirical analysis of venture capital contracts discussed in the article? (Kaplan & Strömberg 2002)

Answer 27

The article compares the characteristics of real-world financial contracts to their counterparts in financial contracting theory by studying the actual contracts between venture capitalists (VCs) and entrepreneurs. The distinguishing characteristic of VC financings is that they allow VCs to separately allocate cash flow rights, board rights, voting rights, liquidation rights, and other control rights. The authors find that these contracts are more complex than those predicted by standard financial contracting theories and that they vary significantly across different VC firms. Additionally, the authors find evidence that VCs use contract terms to mitigate agency problems between themselves and entrepreneurs.

Question 28

How does the research from Kaplan & Strömberg (2002) contribute to our understanding of financial contracting theory?

Answer 28

The research contributes to our understanding of financial contracting theory by providing empirical evidence on the real-world application of these concepts in the context of venture capital contracts. The authors compare the characteristics of actual contracts between venture capitalists and entrepreneurs to their counterparts in financial contracting theory, and find that these contracts are more complex than those predicted by standard theories. The authors also identify specific contract terms that VCs use to mitigate agency problems between themselves and entrepreneurs (board control provisions, preferred stock with liquidation preferences and anti-dilution protection etc). Overall, this research provides valuable insights into how financial contracting theory can be applied in practice, and highlights the importance of considering real-world complexities when designing financial contracts.

Question 28

How does financial contracting affect economic growth and stability? (Hart, 2001)

Answer 28

Financial contracting can have a significant impact on economic growth and stability. Effective financial contracting can help to allocate resources efficiently, promote innovation, and reduce the likelihood of financial crises. For example, well-designed financial contracts can help to align incentives between borrowers and lenders, reducing the risk of moral hazard and adverse selection problems. This can make it easier for entrepreneurs to access financing for new projects and innovations, which can drive economic growth.

Question 29

What is brought up in the article “Recent research on the economics of patents” from (Hall, 2012) ?

Answer 29

The article provides an overview of the economic research conducted on patents and their implications for innovation, technology transfer, and market dynamics.

Question 30

What is Wang’s (2008) paper about?

Answer 30

Wang discusses how entities operate as intermediates in the evolving patent market. Intermediaries are categorized in three groups.

Question 31

What three groups are intermediaries categorized in? (Wang)

Answer 31

• Offensive aggregators: develop patent portfolios for the purpose of collecting licensing fees from alleged infringers.
• Defensive patent aggregators: services that acquire patent rights and license them to subscriber companies. Protecting existing assets in place
• Brokers: advisory function, valuation

Question 32

What is Wang’s (2008) conclusion?

Answer 32

Offensive aggregators appear to deviate most from the goals of the patent system and will be most likely to first fall under any sort of directed legislation. Defensive patent aggregators may have a longer life if they are widely joined, and could eventually evolve into standards-setting licensing borders. Brokers will probably be the longest lasting. The complex valuation nature of IP is something that will remain no matter how transparent the market becomes. Any legislation regulating the intermediary patent market would greatly accelerate its maturation and close any gaps that intermediaries may be exploiting.

Question 33

What does Bonini and Alkan’s (2012) article say?

Answer 33

This paper investigates the political and legal determinants of cross-country differences in venture capital (VC) investments. The authors find strong and positive effects of a favorable sociopolitical and entrepreneurial environment on the inception and development of VC investment activity. Controlling for effects due to the legal system prevailing in each country, they also find strong evidence that this factor plays an important role in explaining cross-sectional variance. Using panel data from 16 countries from 1995 to 2002, they confirm previous studies in showing that active IPO markets, interest rates, corporate income tax rates, and R&D spending are meaningful factors in explaining the cross-country variation in levels of investment. In addition to the existing evidence, they also show that VC investments are strongly facilitated by a more favorable entrepreneurial environment. For the first time, they introduce a homogeneous set of social and political variables, developed by Political Risk Services (PRS), investigating the impact of sociopolitical risk factors on the development and growth of VC activity.

Social, political and legal environment strongly influence the development of new ventures. Legal system plays an important role as well.

Question 34

Hall (2012) mention three observations done, what are they?

Answer 34

First observation: invention is cumulative, with each discovery today building on discoveries in the past. Therefore the incentive created for one invention via the patent right can act to slow down or increase the cost of a subsequent invention.

Second observation: Firms and individuals that are endowed with such a rather complex legal instrument will learn to use it strategically in ways that may not serve the intent if the legislation that created the instrument (accused infringement, kept “sleeping” to disadvantage a competitor)

Third observation: Knowledge-intensive firms can face a number of problems associated with the fact that their assets are largely intangible and patents can help to mitigate these problems.

Question 35

What factors does Bonini & Alkan (2012) find that explain cross-country variation in levels of VC investment? (4 answers)

Answer 35

(1) IPO markets

(2) interest rates

(3) corporate income tax rates

and most importantly:

(4) R&D spending

Question 36

What specific factors contribute to a favorable sociopolitical and entrepreneurial environment for VC investments? (Bonini & Alkan 2012)

Answer 36

(1) Favorable entrepreneurial culture

(2) lower levels of corruption

(3) greater political stability

(4) stronger legal protections for investors.

Question 37

What are the normative implications of the findings in this paper for government and institutions seeking to promote entrepreneurship and innovation? (Bonini & Alkan 2012)

Answer 37

Governments and institutions seeking to promote entrepreneurship and innovation should focus on creating a favorable sociopolitical and entrepreneurial environment, including reducing corruption, increasing political stability, and strengthening legal protections for investors. Additionally, they should consider the impact of different legal systems on VC investments when designing policies to support entrepreneurship and innovation.

Question 38

The Patent System Tradeoffs - Matrisen? (Hall, 2012)

Answer 38

Effects on:

(High-left Grey) Innovation-Benefit: Creates an incentive for R&D; Promotes the diffusion of ideas

(High-right) Innovation-Cost: Impedes the combination of new ideas & indentations; raises transaction costs.

(Low-Left) Competition-Benefit: Facilitiates entry of new small firms with limited assets; Allows trading of inventive knowledge, markets for technology.

(Low-right Grey) Competition-Cost: Creates short-term monopolies, which may become long-term in network industries.

General knowledge about the chart: The high-right and low-left box is the traditional tradeoff between negative effects for competition arising from market power and the positive effects for innovation, while the boxes with grey represent the ways in which patents might actually discourage innovation but enable and encourage competition.

Question 39

What is Romer’s (1990) article about?

Answer 39

It introduces the concept of endogenous technological change, which suggests that technological progress is not exogenously determined but can be influenced by economic factors and policy choices

The author argues that technological change is a key driver of economic growth, and that this change arises in large part because of intentional actions taken by people who respond to market incentives. The model presented in the article resembles the Solow model with technological change, but with an emphasis on endogenous rather than exogenous technological change.

Question 40

Read only for the chart from Hall, (2012) - more information about The Patent System Tradeoffs chart.

Answer 40

This chart suggests that in addition to the familiar arguments that patents increase innovation via incentive effects and diffusion and decrease competition because they create temporary monopolies, there are offsetting effects in both cases, effects that have become more apparent in recent years. These offsetting effects are the tendency of patents to increase the costs of subsequent innovators, especially when these innovators need to combine inventions from many sources, as well as the fact that patents may help competition by facilitating the vertical disintegration of knowledge‐intensive industries and helping new entrants.)

Question 41

What does Romer’s (1990) model suggest?

Answer 41

Romer’s model suggests that a large stock of human capital in an economy will experience faster growth. The model also helps to explain why undeveloped countries without a large stock of human capital are experiencing low growth.

Question 42

What is the article from Jones (2005) telling us?

Answer 42

The article discusses the idea that ideas are nonrivalrous, meaning that no one possesses less of an idea because someone else possesses it. This leads to increasing returns to scale, where output per person depends on the total stock of ideas in the economy instead of the per capita stock of ideas.

The article also discusses how resource allocation is affected in an area where ideas play a crucial role. The Romer-style equilibrium with imperfect competition is one mechanism for allocating resources in such an economy.

Additionally, the article explores strong and weak scale effects and their different implications for growth and policy invariance. Strong scale effects occur when output per person increases as population size increases, while weak scale effects occur when output per person increases as the number of people engaged in research and development increases.

Question 43

What are the key findings of the Romer (1990) article? 5 Key Takeaways (3 tech changes and two others)

Answer 43

1. Technological change is a non-rival, partially excludable good that cannot be supported by price-taking competition, because once an innovation has been introduced into the market, other firms can use it without reducing its value to the original innovator. This means that there is no longer perfect competition and firms may have some degree of market power.
2. Technological change provides the incentive for continued capital accumulation, and together, capital accumulation and technological change account for much of the increase in output per hour worked.
3. Technological change arises in large part because of intentional actions taken by people who respond to market incentives.
4. Policies that encourage investment in research and development can lead to sustained economic growth.
5. The most interesting positive implication of the model is that an economy with a larger total stock of human capital will experience faster growth. This finding suggests that free international trade can act to speed up growth due to new technologies, resources and ideas.

Question 44

How does the non-rival nature of technology as an input affect price-taking competition? (Romer 1990)

Answer 44

According to the article “Endogenous Technological Change” by Paul M. Romer, the non-rival nature of technology as an input affects price-taking competition because it introduces non-convexity (oberäkligheter) into the market. In a market with a rival good, price-taking competition can be supported because each firm can produce as much as it wants without affecting the price of the good. However, in a market with a non-rival good like technology, this is not the case. Once an innovation has been introduced into the market, other firms can use it without reducing its value to the original innovator. This means that there is no longer perfect competition and firms may have some degree of market power. As a result, instead of price-taking competition, the equilibrium in a market with non-rival goods is one with monopolistic competition. This means that firms have some degree of pricing power and can charge prices above their marginal costs. Overall, the non-rival nature of technology as an input affects price-taking competition by introducing non-convexity into the market and creating conditions for monopolistic competition rather than perfect competition.

Question 45

Critique from Jones (2005)?

Answer 45

The article addresses the linearity critique, which challenges the validity of growth accounting in idea-based models. This critique argues that quality improvements are not accounted for in traditional growth accounting methods. However, incorporating quality improvements into the analysis can address this issue.

Question 46

What is the relationship between the stock of human capital and the rate of growth? (Romer 1990)

Answer 46

According to the information provided in the article on Page 1, there is a positive relationship between the stock of human capital and the rate of growth. The article states that “the stock of human capital determines the rate of growth” and suggests that too little human capital devoted to research can limit growth rates. Human capital refers to the knowledge, skills, and abilities that individuals possess and can use to create economic value. By investing in education, training, and other forms of human capital development, societies can increase their capacity for innovation and productivity, which can lead to higher rates of economic growth. Overall, the article suggests that there is a strong relationship between the stock of human capital and the rate of growth, with greater investment in human capital generally leading to higher rates of economic development.

Question 47

How does integration into world markets impact growth rates? (Romer 1990)

Answer 47

Integration into world markets can increase growth rates. The article suggests that “integration into world markets will increase growth rates” and that having a large population is not sufficient to generate growth. Integration into world markets can provide access to new technologies, ideas, and resources, which can help firms become more productive and competitive. By participating in global trade and investment flows, countries can also benefit from economies of scale and specialization, which can lead to increased efficiency and higher output.

Question 48

What is the main idea behind the simple idea-based growth model ? (Jones, 2005)

Answer 48

The main idea behind the simple idea-based growth model is that economic growth is driven by the accumulation of nonrivalrous ideas, which are created through R&D investments by firms.

Question 49

What is Gompers & Lerners (1998) article about?

Answer 49

In this article Gompers and Lerner discuss that venture capitalists use inside information to time stock distributions. Distributions of firms brought public by lower quality underwriters and of less seasoned firms have more negative price reactions.

Question 50

How does the Romer-style equilibrium with imperfect competition affect resource allocation in the richer model? (Jones, 2005) (Market failures)

Answer 50

Overall, the Romer-style equilibrium with imperfect competition helps address market failures that may prevent firms from investing enough in R&D (because the founder of the idea don’t get the full benefit of the idea because other companies copies it) and provides a mechanism for allocating resources in an economy where ideas play a crucial role.

The Romer-style equilibrium with imperfect competition affects resource allocation in the richer model by providing a mechanism for allocating resources in an economy where ideas play a crucial role. In this equilibrium, firms invest in research and development (R&D) to create new ideas and products, which can lead to further economic growth. However, because ideas are nonrivalrous, firms may not be able to fully capture the benefits of their R&D investments. This can lead to market failures that prevent firms from investing enough in R&D. The Romer-style equilibrium with imperfect competition addresses this issue by allowing firms to earn monopoly profits on their new products for a limited time period. This provides an incentive for firms to invest more in R&D and create new ideas.

Question 51

What evidence do they find in their article? (Gompers & Lerner 1998)

Answer 51

Venture capitalists serve as general partners (GP) and the investors are limited partners (LP). By distributing shares to limited partners, who are usually not considered insiders (venture capitalists are registered as insiders), the venture capitalist can dispose of a large block of shares more quickly. These sales occur after substantial run-ups in share value. In the months after distribution, returns apparently continue to be negative.

Question 52

The linearity critique and its relevance to growth accounting in idea-based models? (Jones, 2005)

Answer 52

The linearity critique is a criticism of growth accounting in idea-based models, which assumes that the contribution of different factors to economic growth is linear and additive. The critique argues that this assumption may not hold in an economy where ideas play a crucial role, as the impact of different factors on economic growth may be nonlinear and interactive.

Overall, the linearity critique highlights the need for more sophisticated methods for measuring the contribution of different factors to economic growth in an economy where ideas play a crucial role. This may involve developing models that account for nonlinear and interactive effects between different factors.

Question 53

What are venture capital distributions and how do they affect share prices? (Gompers and Lerner 1998)

Answer 53

Venture capitalists can liquidate their position in the company by selling shares on the open market and then paying those proceeds to investors in cash. More frequently, however, venture capitalists (GP with insider information) make distributions of shares to investors (LP) in the venture capital fund. The share price will be negative after this occurs. These sales can have a substantial price reaction immediately around the event, and returns may continue to be negative in the months after distribution. The share price may drop at the time of distribution due to factors such as the ending of the venture capitalists’ value-added monitoring and the large increase in the public supply of shares after distribution.

Question 54

How do venture capitalists use inside information to time stock distributions? (Gompers & Lerner 1998)

Answer 54

The study by Paul Gompers and Josh Lerner suggests that venture capitalists use inside information to time stock distributions. Specifically, the evidence is consistent with the market reacting to the inside information of the venture capitalist. Distributions of firms brought public by lower quality underwriters and of less seasoned (mindre välkapitaliserade) firms have more negative price reactions. This suggests that venture capitalists may be using their insider knowledge to time their stock distributions in a way that maximizes their returns.

Question 55

Hellman, (2022) - Key takeaways? (What impact does VC/PE have on firms - professionalization measures?)

Answer 55

The article explores the impact of venture capital (VC) investments on the professionalisation and growth of Silicon Valley start-up firms.

Key points from Hellmann and Puri’s article on venture capital and the professionalization of start-up firms include:

Professionalization measures: HR policies, adoption of stock option plans, hiring of a marketing VP, government structures.

Venture-capital-backed companies are also more likely and faster to replace the founder with an outside CEO.

Conclusion: The study concludes that venture capital can have a significant impact on the development of new firms.

Key findings (from ChatPDF):

1. Venture capital is related to various professionalization measures, such as human resource policies, adoption of stock option plans, and hiring a marketing VP.
2. Venture-capital-backed companies are more likely and faster to replace the founder with an outside CEO.
3. The impact of venture capital on professionalization is stronger in situations that appear adversarial than those that are mutually agreed to.
4. The study provides evidence that venture capital can have a significant impact on the development of new firms.

Question 56

What factors influence the price reactions of venture capital distributions, and how can investors use this information to make better investment decisions? (Gompers & Lerner 1998)

Answer 56

Several factors can influence the price reactions of venture capital distributions. These include:
(1) the age of the venture organization making the distribution,
(2) the quality of underwriters used to bring a firm public, and
(3) the experience level of the firm.
Specifically, distributions by more experienced venture capitalists should produce more negative price reactions if markets are reacting to insider trading by venture capitalists. Distributions of firms brought public by lower quality underwriters and less seasoned firms also have more negative price reactions.

Investors can use this information to make better investment decisions by considering these factors when evaluating potential investments in companies that have received venture capital funding. For example, investors may want to be cautious about investing in companies that have recently had a distribution by a less experienced venture capitalist or were brought public by lower quality underwriters.

Question 57

What is the article of Kaplan & Lerner (2010) about? (History)

Answer 57

The examine the US VC industry in an historical context and asses the current state of the VC market, and discuss the implications of that history and the current conditions for the future.

Question 58

What is the problem and the solution that VC is trying to solve? (Kaplan & Lerner 2010)

Answer 58

VC is trying to solve the problem of connecting entrepreneurs with good ideas (but no money), with investors who have money but are looking for good ideas.

Question 59

What is the solution activities that VC firms brings to early-stage companies? (Kaplan & Lerner 2010)

Answer 59

The solution can be divided into three activities:

(1) Screening - look for attractive investments, considering strategy, technology, market size, competition.

(2) Contracting - design an optimal contract that induces the entrepreneur to maximize value for the company, although VC firms must consider cash flow rights, voting rights, board rights, liquidation rights.

(3) Monitoring - provides governance and monitoring. For instance, replacing the entrepreneur when it becomes clear the entrepreneur is not up to the task of growing the company. Or assisting with strategy, hiring other executives and give access to new customers and partners.

Question 60

Provide a brief history of VC and historical fundraising and investments (Kaplan & Lerner 2010)

Answer 60

Uncommon to get VC funding, but those who get VC funding have a high chance of going public. Between 1999-2009, 60% of IPOs had VC funding.

People who argue that the VC model is broken is due to excessive amounts of capital in the industry coupled with bad returns. VC has invested 0.2% of the value of the stock market each year. VC commitments are not high.

Question 61

What is the historical difference in performance between VCs vs the Public market? (Kaplan & Lerner 2010)

Answer 61

• The average fund slightly underperformed the public stock market after the VC.

-However, the capital weighted average fund outperformed the public market.

• Much of the returns are contingent on the timing of the VC fund.

Caveats: - results do not include the dot-com bust. + studies indicate that Kaplan and Schoar may underestimate VC performance.

Question 62

What does Kaplan & Lerner (2010) mention about persistence?

Answer 62

• Large differences between the bottom and top quartiles. Subsequent fund performance is significantly related to previous fund performance.

-Tradeoff between size and performance. $200m, negative effect of size kicks in and performance stops increasing with size. Over $200m, performance clearly begins to decline .

Question 63

What do they mention about fundraising(from LP) and future/historical performance from the VC firm? (Kaplan & Lerner 2010)

Answer 63

When performance is strong, LPs commit more capital to VC. However, this has an adverse impact on future returns. Poor returns – decreased inflows – lead to recovery in returns.

Question 64

What Kaplan & Lerner (2010) mention in the headline “Looking forward”?

Answer 64

One of the reasons that some believe the VC model is broken is the increased difficulty of taking companies public.
During 2004-2007, VC backed firm IPOs averaged only 50 per year, despite robust stock market returns. Reasons for this could be: increased costs due to Sarbanes-Oxley legislation, increased litigation risks or inattention from IBs as they were able to make more money from other activities.
Several mays for VC to exit: selling company portfolios, M&A

Question 65

What does Kaplan & Lerner (2010) predict will happen in the next several years for VC firms?

Answer 65

Evidence suggests that venture-backed firms are approx. 3x as efficient in generating innovations as corporate research. Ultimately, this would result in high demand for venture-backed firms in the medium and longer term.

Question 66

How has venture capital evolved over time, and what does the future hold for this industry? (Kaplan & Lerner 2010)

Answer 66

The authors suggest that venture capital has evolved over time and will continue to do so in response to changing market conditions. However, they do not provide a specific prediction for what the future holds for this industry.

For example, they note that the industry has shifted from a focus on early-stage investing to later-stage investing, and that it has become more institutionalized over time. They also suggest that the industry will continue to evolve in response to changing market conditions, but they do not provide a specific prediction for what the future holds for this industr

Question 67

Pros with patents? (All articles)

Answer 67

Pro: Without legal protection there are low incentives to innovate. The production processes are different compared to goods. (Romer, 1990). Gans and Stern (2005) suggest that IP protection is important for a market of ideas to exist → idea complementary, user reproducibility, Value rivalry. Hall & Harroff (2012) believes the pros with patent is that it creates incentives to innovate, it allows a market for trading ideas, and it supports diffusion of ideas (vs industry secrets, depending on strength of patent structure). Makes it possible for small firms to enter a market (If given patent → easier to assert themselves in the market). Jones (2005) states that perfectly competitive markets may prevent optimal capital allocation, however phenomenons, being ideas themself, such as patent systems and research universities are examples of institutions that improve welfare.

Question 68

Cons with patents? (All articles)

Answer 68

Con: Rent-seeking. Players within the industry race to patent approval → suboptimal allocation of resources. First-mover advantage → if being “quiet” there will still be initial profits to make before the market reacts on the idea. Sequential innovation → incentives for acquiring new patents decrease as there are patents protecting linked ideas (Boldrin & Levine). Hall & Harroff (2012) believes the cons with patents are that it induces short term monopolies, which might be long-term after patent ending. Impede the diffusion of innovation, since it is hard to combine innovations which are patented.

Question 69

The hold up problem? (Kaplan - Strömberg)

Answer 69

The Hold-up problem is essentially composed of insufficient contracts that might enable moral hazardous behaviour.

Question 70

Articles that includes agency problem?

Answer 70

Jensen (1989), Kaiser and Westarp (2010), Kaplan and Strömberg (2002),

Question 71

Articles that includes value creation with VC?

Answer 71

Kaiser and Westarp (2010) (PE); Hellman & Puri, (2002) (VC)

Question 72

Article that include structure of VC?

Answer 72

Kaiser and Westarp (2010)

Question 73

Articles that includes “returns” for buyouts etc?

Answer 73

Kaiser and Westarp (2017), large PE firms outperform small firms.

Question 74

Articles that includes growth?

Answer 74

Romer (1990); Jones (2005) (Pro IP protection) → Nonrival nature of ideas → Increasing return to scale→ economic growth Financial systems: Merton and Bodie (2005) Market for ideas: Gans and Stern (2005)

Question 75

Articles that include patents?

Answer 75

Gans and Stern (2005); Boldrin and Levine (2005) (Concludes that we are better off without patents); Wang (2008) (Intermediaries, Offensive/defensive aggr. and Brokers); Hall and Harhoff (2012) (Agrees that it incentivises innovation, but however a trade-off. Professionals, excl healthcare claims, that innovation is independent of patent)

Question 76

Articles that includes financial contracting?

Answer 76

Hart (2001), Kaplan and Strömberg (2002)

Question 77

Articles that includes LBO?

Answer 77

Jensen (1989)

Question 78

Aineas Pre-money and post-money valuation calculations (Pre and post money valuation)

Answer 78

1. Discounted Terminal value:

(1) Net-income in x years * P/E = Terminal value

(2) Terminal value / 1+required return^antal år = DTV

2. % Ownership = Investment / DTV
3. # New shares issued = Outstanding shares / (1-% ownership) - Outstanding Shares
4. Price of share = The investment made / The new issued shares
5. Pre-money valuation = Price of the share * old outstanding shares
6. Post money valuation = Price of the share * New outstanding shares

Question 79

Aineas: Calculate Price of Share with dilution?

Answer 79

1. Retention ratio (Utspädning):

1 / dilution.. / dilution.. / dilution.. = Retention ratio (OBS antal dilutions varierar)

2. Old % of Ownership (calculated in question (a) usually) / Retention ratio = Required Ownership % (new with dilution)
3. Outstanding shares / (1-new ownership %) - Outstanding shares
4. Investment / Number of new shares = Price of share

Question 80

Repugnance problem? (Gans, 2005)

Answer 80

Repugnance problem in markets for ideas refers to the normative value placed on “free” disclosure in Open Science, which undermines the ability of idea producers to earn market-based returns for producing valuable knowledge. This means that even if an idea is highly valuable, it may not be accepted or exchanged due to societal norms or values. This can affect market design by limiting the efficiency of the exchange of pure ideas and requiring alternative policies and institutions to promote their exchange. Examples: atomic pump, drugs, slavery, child label.