Essays on entrepreneurial finance

Abstract

This dissertation consists of an introduction and three original essays.

The first essay provides causal evidence that managers extrapolate when making real investment decisions. Managers of small, weather-sensitive businesses increase investment in response to temporary and weather-induced increases to their cash flows. This is consistent with the idea that their expectations of long term future cash flows have improved as a result of a temporary shock to current cash flows. Extrapolation has negative outcomes for these firms, with more firms shutting down in subsequent years.

The second essay (joint with Deniz Okat) attempts to provide causal evidence that high levels of corporate cash holdings lead to wasteful investments (i.e. cash holdings create manager-shareholder agency problems). Using the exercise of the greenshoe option during the initial public offering (IPO) process as an exogenous cash infusion to firms, we show that firms receiving cash "randomly" make more acquisitions and that these acquisitions have lower returns.

The third essay (joint with Elina Koivisto) examines the role of entrepreneur appearance in early-stage investment decisions. We ask participants on Amazon's MTurk service to rate a series of real investment pitches from the Slush 100 pitching competition on three dimensions of appearance: The appearance of competence, trustworthiness and attractiveness. We find that entrepreneurs whose appearance is rated "more competent" are significantly more likely to attract angel investment and venture capital with weaker but still positive effects for the appearance of trustworthiness.