REVISION: Contracts with Benefits: The Implementation of Impact Investing
Impact investing adds a social-benefit goal to the usual financial goal of investing. The additional goal complicates the alignment of incentives through layers of agency, and raises the question of how contracting practices should adapt. We draw on legal documents from impact funds to address this adaptation empirically, and relate it to contract theory. We find that the contracts with both portfolio companies and investors use new terms to directly operationalize impact, and also adjust the use of existing terms on governance and compensation. Moreover, funds’ direct contracting on impact with investors passes through to their contracting with portfolio companies.
New: Corporate Culture As an Implicit Contract
We develop a measure of corporate culture using coworker connectivity on LinkedIn's platform, and show it is strongly correlated with positive employee relations and satisfaction. Using state-level changes to employment agreements as shocks to explicit contracts, we find that these changes significantly impact employees in weakly connected firms, but have little to no effect on those at strongly connected firms. Our results suggest that firms with strong corporate culture are less dependent on explicit contracts to retain human capital. We document implications for firms' investment decisions and other outcomes.
REVISION: The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship
This paper finds that increased restrictions on labor mobility generate a substantial trade-off between entrepreneurial activity and capital investment. Using LinkedIn's database of employment histories and occupations combined with staggered changes in the enforceability of non-compete agreements, results show that stronger non-compete enforceability systematically leads to a widespread decline in employee departures, driven by workers in knowledge-intensive occupations. Departures to new firms decline substantially. In turn, new firm entry in corresponding sectors decreases. The trade-off is that the investment rate at existing firms increases sharply, driven by firms that employ knowledge-intensive workers.
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 ...