REVISION: Contracts with (Social) Benefits: The Implementation of Impact Investing
We draw on new data and theory to examine how private market contracts adapt to serve multiple goals, particularly the social-benefit goals that impact funds add to their financial goals. Counter to the intuition from multitasking models (Holmstrom and Milgrom, 1991), few impact funds tie compensation directly to impact, and most retain traditional financial incentives. However, funds contract directly on impact in other ways and adjust aspects of the contracts like governance. In the cross-section of impact funds, those with higher profit goals contract more tightly around both goals. We propose an explanatory framework in which this feature results from hidden differences between agents’ preferences over impact.
REVISION: Labor Reactions to Credit Deterioration: Evidence from LinkedIn Activity
We examine workers' reactions to signals of their firms' credit deterioration using anonymized networking activity on LinkedIn. We show significant increases in weekly connection formation following the announcement of a negative credit watch. More senior and more skilled workers have the strongest reactions, and increased connection activity appears for both workers who leave and workers who stay at the firm. Positive credit news and non-credit economic news like missed earnings do not trigger similar changes in networking activity. Our results appear consistent with a precautionary motive for networking.
REVISION: The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship
This paper examines how labor frictions affect investment rate and new firm entry. Using matched employee-employer data from LinkedIn, I first show that increases in the enforceability of non-compete agreements lead to widespread declines in employee departures across seniority levels, driven by workers in knowledge-intensive occupations. Investment rates at existing firms increase, especially for firms that employ more skilled workers. This comes at the expense of new firm entry, which declines substantially in knowledge-intensive sectors. The results suggest that labor frictions play an important role in investment decisions, and that NCs may factor into slowing business dynamism.
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: 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 ...