REVISION: Contracts with Benefits: The Implementation of Impact Investing
Impact investing private equity and venture capital funds are a rapidly emerging force in capital markets, premised on the service of two goals at once: a financial goal as well as a social-benefit goal. The addition of this second objective complicates the already challenging problem of aligning incentives across layers of agency, and raises the question of how contracting practices should adapt. We draw on contract theory and a unique set of legal documents from impact funds to answer this both normatively and positively. Contracts struck by impact funds, both forward to portfolio companies and back to investors, use new terms to directly operationalize impact, and also adjust the use of existing terms on governance, investor protection, and other concerns to facilitate it. Moreover, funds’ direct contracting on impact with investors passes through to their contracting with portfolio companies. For the most part, observed contracting terms align with theory, though they also differ ...
REVISION: The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship
I investigate the impact of restricting labor mobility on two components of growth: entrepreneurship and capital investment. To identify the mechanism, I combine LinkedIn's database of employment histories with staggered changes in the enforceability of non-compete agreements that come mostly from court rulings. Stronger enforceability leads to a substantial decline in employee departures, especially in knowledge-intensive occupations, and reduces entrepreneurship in corresponding sectors. However, these shocks increase the investment rate at existing knowledge-intensive firms. The estimates in my sample suggest that, in such sectors, there is roughly $1.8 million of additional capital investment from publicly-held firms for every lost new firm entry.
REVISION: In Pursuit of Good & Gold: Data Observations of Employee Ownership & Impact Investment
A startup’s path to self-sustaining profitability is risky and hard, and most do not make it. Venture capital (VC) investors try to improve these odds with contractual terms that focus and sharpen employees’ incentives to pursue gold. If the employees and investors expect the startup to balance the goal of profitability with another goal — the goal of good — the risks are likely to both grow and multiply. They grow to the extent that profits are threatened, and they multiply to the extent that balancing competing goals adds a dimension to the incentive problem. In this Article, we explore contracting terms specific to impact investing funds and their portfolio companies. We observe one possible private ordering mechanism to balance and align interests to serve both goals: employee ownership.
Traditional VC investments confront contracting challenges as the portfolio companies and investors balance their interests, which may not align. Additionally, portfolio companies are ...
New: Great Expectations: Mission Preservation and Financial Performance in Impact Investing
Over the past decade, limited partners have increased capital allocations to socially driven private equity funds with the goal to generate long-term impact alongside financial returns. To understand funds' abilities to meet these goals, we gather detailed mission and financial data from 53 impact investing private equity funds, representing 557 individual investments. In our sample we find that while fund managers are overwhelmingly optimistic about mission preservation, few exits have any contractual statements about preserving mission. Regarding financial performance, our set of market-rate-seeking funds achieved gross results comparable to non-impact investment options along a broad range of measures, suggesting it is possible to generate market returns as an impact fund.
REVISION: Institutional Investing When Shareholders Are Not Supreme
Institutional investors, with trillions in assets under management, hold increasingly important stakes in public companies and fund individual retirement for many Americans, making institutional investors’ behaviors and preferences paramount determinants of capital allocations and the economy. In this paper, we examine high fiduciary duty institutions' (HFDIs') response to decreased profit maximization pressure as measured by the effect of constituency statutes on HFDI investment. We ask this question, in part, to anticipate HFDIs’ response to alternative purpose firms, like benefit corporations. Only with access to institutional investors’ capital can alternative purpose firms gain economic significance to rival the purely for-profit corporation.
In our empirical study, we ask whether decreased profit maximization pressure, as evidenced by expanded director discretion to pursue nonshareholder interests, affected HFDIs’ decision to invest (or remain invested) in firms incorporated ...