- 02 Mar 2011
- Research & Ideas
Managing the Open Source vs. Proprietary Decision
In their new book, The Comingled Code, HBS professor Josh Lerner and London School of Economics professor Mark Schankerman look at the impact of open source software on economic development. Our book excerpt discusses implications for managers. Closed for comment; 0 Comments.
- 24 Jun 2010
- Working Paper Summaries
“An Unfair Advantage”? Combining Banking with Private Equity Investing
Does the combination of banking and private equity investing endow banks with superior information that allows them to identify good prospects and garner superior returns? Or does the combination bestow banks with an unfair ability to expand their balance sheets, capturing benefits within the bank at the expense of the overall market and ultimately the taxpayers? INSEAD's Lily Fang and Harvard Business School professors Victoria Ivashina and Josh Lerner examined nearly 8,000 unique private equity transactions between 1978 and 2009, looking in depth at the nature of the private equity investors, the structure of the investments, and the performance of the firms. Collectively, findings suggest that there are risks in combining banking and private equity investing. The results are consistent with many of the worries about these transactions articulated by policymakers. Key concepts include: The cyclicality of bank-affiliated transactions, the time-varying pattern of the financing benefit enjoyed by affiliated deals, and the generally worse outcomes of these deals done at market peaks raise questions about the desirability of combining banking with private equity investing. These investments seem to exacerbate the amplitude of waves in the private equity market, leading to more transactions at precisely the times when the private and social returns are likely to be the lowest. Investments involving both affiliated and nonaffiliated firms appear particularly vulnerable to downturns. Some information-related synergies, however, are captured internally by the banks. But banks' involvement poses significant issues as well. The share of banks in the private equity market is substantial. Between 1983 and 2009, over one-quarter of all private equity investments involved bank-affiliated private equity groups. Closed for comment; 0 Comments.
- 15 Apr 2010
- Working Paper Summaries
The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis
What difference do angel investors make for the success and growth of new ventures? William R. Kerr and Josh Lerner of HBS and Antoinette Schoar of MIT provide fresh evidence to address this crucial question in entrepreneurial finance, quantifying the positive impact that angel investors make to the companies they fund. Angel investors as research subjects have received much less attention than venture capitalists, even though some estimates suggest that these investors are as significant a force for high-potential start-up investments as venture capitalists, and are even more significant as investors elsewhere. This study demonstrates the importance of angel investments to the success and survival of entrepreneurial firms. It also offers an empirical foothold for analyzing many other important questions in entrepreneurial finance. Key concepts include: Angel-funded firms are significantly more likely to survive at least four years (or until 2010) and to raise additional financing outside the angel group. Angel-funded firms are also more likely to show improved venture performance and growth as measured through growth in Web site traffic and Web site rankings. The improvement gains typically range between 30 and 50 percent. Investment success is highly predicated by the interest level of angels during the entrepreneur's initial presentation and by the angels' subsequent due diligence. Access to capital per se may not be the most important value-added that angel groups bring. Some of the "softer" features, such as angels' mentoring or business contacts, may help new ventures the most. Closed for comment; 0 Comments.
- 13 Jan 2010
- Working Paper Summaries
Private Equity and Industry Performance
In response to the global financial crisis that began in 2007, governments worldwide are rethinking their approach to regulating financial institutions. Among the financial institutions that have fallen under the gaze of regulators have been private equity (PE) funds. There are many open questions regarding the economic impact of PE funds, many of which cannot be definitively answered until the aftermath of the buyout boom of the mid-2000s can be fully assessed. HBS professor Josh Lerner and coauthors address one of these open questions, by examining the impact of PE investments across 20 industries in 26 major nations between 1991 and 2007. In particular, they look at the relationship between the presence of PE investments and the growth rates of productivity, employment, and capital formation. Key concepts include: It is still too early to assess the consequences of the economic conditions in 2008 and 2009, a period where the decrease of investment and absolute volume of distressed private equity-backed assets was far greater than in earlier cycles. Despite this caveat, it appears that: PE investments are associated with faster growth. There is little evidence that economic fluctuations are exacerbated by the presence of PE investments. In industries with PE investments, there are few significant differences between industries with a low and high level of PE activity. Activity in industries with PE backing appears to be no more volatile in the face of industry cycles than in other industries, and sometimes less so. The reduced volatility is particularly apparent in employment. These patterns continue to hold when the focus is on the impact of private equity in continental Europe, where concerns about these investments have been most often expressed. Closed for comment; 0 Comments.
- 07 Dec 2009
- Research & Ideas
Government’s Positive Role in Kick-Starting Entrepreneurship
The U.S. government has spent billions of dollars bailing out troubled companies. Is it time for Uncle Sam to invest in new entrepreneurial firms as well? Professor Josh Lerner makes the case for limited government involvement in his book Boulevard of Broken Dreams. Closed for comment; 0 Comments.
- 06 Aug 2009
- Working Paper Summaries
Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion
From Silicon Valley to Herzliya, Israel, venture capital firms are concentrated in very few locations. More than half of the 1,000 venture capital offices listed in Pratt's Guide to Private Equity and Venture Capital Sources are located in just three metropolitan areas: San Francisco, Boston, and New York. More than 49 percent of the U.S.-based companies financed by venture capital firms are located in these three cities. This paper examines the location decisions of venture capital firms and the impact that venture capital firm geography has on investments and outcomes. Findings are informative both to researchers in economic geography and to policymakers who seek to attract venture capital. Key concepts include: The success rate of venture capital investments in a region is an important determinant of venture capital firms' decisions to open new branches. While venture capital firms in San Francisco, Boston, and New York City outperform, their outperformance is not driven by local investments. While their performance in investments everywhere is better than that of their peers based in different cities, the outperformance is particularly striking outside the cities where they have offices. Interestingly, some of the performance disparity between local and nonlocal investments disappears when a venture firm does more than one investment in a region, suggesting that as the marginal monitoring cost falls, venture capital firms may reduce their expected success rate for investment in a distant geography. Closed for comment; 0 Comments.
- 17 Apr 2009
- Working Paper Summaries
The Investment Strategies of Sovereign Wealth Funds
The role of sovereign wealth funds (SWFs) in the global financial system has been increasingly recognized in recent years, and many reports suggest that SWFs are often employed to further the geopolitical and strategic economic interests of their governments. The resources controlled by these funds—estimated to be $3.5 trillion in 2008—have grown sharply over the past decade. Projections, while inherently tentative due to the uncertainties about the future path of economic growth and commodity prices, suggest that they will be increasingly important actors in the years to come. Despite this significant and growing role, financial economists have devoted remarkably little attention to these funds. The lack of scrutiny must be largely attributed to the deliberately low profile adopted by many SWFs, which makes systematic analysis challenging. Bernstein, Lerner, and Schoar analyze how SWFs vary in their investment styles and performance across various geographies and governance structures. Taken as a whole, results suggest that high levels of home investments by SWFs, particularly those with the active involvement of political leaders, are associated with trend chasing and worse performance. Key concepts include: Sovereign wealth funds (SWFs) present an ideal object of investigation to understand the interaction between finance and political economy. The direct private equity investments analyzed here are one of the few dimensions of SWF investments on which it is possible to obtain comprehensive information. SWFs seem to engage in a form of trend chasing, since they are more likely to invest at home when domestic equity prices are higher, and invest abroad when foreign prices are higher. SWFs where politicians are involved have a much greater likelihood of investing at home than those where external managers are involved. Funds with politicians involved invest in higher P/E (price earnings ratio) industries, which have a negative valuation change in the year after the investment. Much research remains to better understand the underlying investment objectives of SWFs, their investment strategies, and their organizational differences, as well as the constraints they face due to internal and external pressures. Closed for comment; 0 Comments.
- 25 Feb 2009
- Working Paper Summaries
Fear of Rejection? Tiered Certification and Transparency
The sub-prime crisis has thrown a harsh spotlight on the practices of securities underwriters, which provided too many complex securities that proved to ultimately have little value. Certifiers such as rating agencies, journals, standard setting bodies, and providers of standardized tests play an increasingly important role in the market economies. Yet as scrutiny of rating agencies in the aftermath of the sub-prime crisis has shown, these organizations have complex incentive structures and may adopt problematic approaches. On an explicit level, all major rating agencies follow a well-defined process, whose end product is the publication of a rating based on an objective analysis. But firms have been historically able to get rating agencies not to disclose ratings that displease them. HBS professor Josh Lerner and colleagues examined when certifiers might adopt more complex rating schemes, rather than the simple pass-fail scheme, and highlight that such nuanced schemes are more likely when the costs of such ratings are lower. In addition, these schemes are more common when sellers are less averse to the revelation of information about their quality, and more impatient. Key concepts include: Absent regulation, certifiers have a strong incentive not to publicize rejected applications. Transparency regulation always benefits sellers, but need not benefit users. Closed for comment; 0 Comments.
- 02 Feb 2009
- Research & Ideas
The Success of Persistent Entrepreneurs
Want to be a successful entrepreneur? Your best bet might be to partner with entrepreneurs who have a track record of success, suggests new research by Paul A. Gompers, Josh Lerner, David S. Scharfstein, and Anna Kovner. Key concepts include: Previously successful entrepreneurs are significantly more likely to lead successful new ventures than first-timers or those who previously failed. Successful entrepreneurs are adept at selecting the right industry and time to start new ventures. Suppliers and customers are more likely to back a person with previous successes. Closed for comment; 0 Comments.
- 03 Dec 2008
- Working Paper Summaries
Performance Persistence in Entrepreneurship
All else equal, a venture-capital-backed entrepreneur who starts a company that goes public has a 30 percent chance of succeeding in his or her next venture. First-time entrepreneurs, on the other hand, have only an 18 percent chance of succeeding, and entrepreneurs who previously failed have a 20 percent chance of succeeding. But why do these contrasts exist? Such performance persistence, as in the first example, is usually taken as evidence of skill. However, in the context of entrepreneurship, the belief that successful entrepreneurs are more skilled than unsuccessful ones can induce real performance persistence. In this way, success breeds success even if successful entrepreneurs were just lucky. Success breeds even more success if entrepreneurs have some skill. Key concepts include: There is evidence for the role of skill as well as the perception of skill in inducing performance persistence. Closed for comment; 0 Comments.
- 05 Nov 2008
- Working Paper Summaries
The Litigation of Financial Innovations
The past 10 years have seen a profound change in the conditions under which financial innovations are pursued. Because patents fundamentally alter the way in which innovations can be used, assessing the impact of patenting is critical to understanding the future of financial innovation. Litigation is crucial to delineating the boundaries of patent awards, and this paper examines the litigation of such financial patents to gain insights into the future of financial innovation. This paper seeks to understand the litigation of financial innovations, an area where patents have only recently been granted. Key concepts include: Financial patents are litigated two to three dozen times more frequently than patents as a whole. The awards being litigated are disproportionately those awarded to individuals and to smaller, private entities. Patents with more claims and more citations are also more frequently litigated. Larger firms are disproportionately targeted in litigation. Closed for comment; 0 Comments.
- 17 Sep 2008
- Working Paper Summaries
Secrets of the Academy: The Drivers of University Endowment Success
University endowments are important and interesting institutions both in the investing community and society at large. They play a role in maintaining the academic excellence of many universities that rely heavily on income from their endowments. In contrast, poor finances can undermine a school's ability to provide academic services altogether. Endowments have also received much attention recently for their superior investment returns compared with other institutional investors. In this study, the authors document the trends in college and university endowment returns and investments in the United States between 1992 and 2005. Key concepts include: Many unanswered questions remain about university endowments. Results suggest that endowment sizes are skewed, with the rich universities getting richer while other schools fall behind. Much of the growth in endowment size has been driven by investment performance. The top endowments posted impressive returns in 2005, averaging a net real return of 12.3 percent compared with 4.4 percent posted by the Standard & Poor's 500 index in the same year. Across endowments, institutional characteristics such as endowment size and admissions selectivity are better predictors of success than the allocation to risky asset classes. Moreover, top endowments seem to possess superior asset selection ability beyond their strategies for allocating funds to certain asset classes. Ordinary investors could not necessarily achieve similar results by mimicking the strategies of top endowments. Indeed, the same strategies that have worked so well for the endowments in the past two decades may not do so in the future. Closed for comment; 0 Comments.
- 09 Jun 2008
- Lessons from the Classroom
Monetizing IP: The Executive’s Challenge
Many companies fail to develop a strategy around protecting and monetizing their intellectual property. In this Q&A, Harvard Business School professor Josh Lerner discusses current trends in IP including the rise of patent pools. Closed for comment; 0 Comments.
- 29 Apr 2008
- Research Event
Venture Capital
Professor Josh Lerner provides a summary report on the recently held HBS Centennial colloquium on venture capital. Closed for comment; 0 Comments.
- 14 Mar 2007
- Op-Ed
Government’s Misguided Probe of Private Equity
The U.S Department of Justice has begun an inquiry into potentially anti-competitive behavior on the part of leading private equity firms. Professor Josh Lerner looks to history to underscore why this move carries the prospect of damaging what is actually an incredibly competitive industry that creates much value. Key concepts include: The Justice Department, which has little understanding of the nuances of the private equity business, could repeat missteps of the past by mistaking competition for collusion. Deal sharing, in the crosshairs of the inquiry, actually helps investors make better investment decisions, helps companies' managements, and helps limit risk. The benefits to society from widespread venture syndication appear to substantially outweigh the costs. Washington must understand that the many benefits private equity provides by facilitating economic growth are unlikely to be sustained if the heavy hand of government intrudes, whether through litigation or regulation. Closed for comment; 0 Comments.
- 22 Dec 2006
- Research & Ideas
What’s Behind the Private Equity Boom?
Podcast: On just one day in November, $52 billion worth of private equity deals were announced, and more than $200 billion worth of deals have been agreed to so far in 2006. The deals include such major names as Qantas ($8.7 billion), Hertz ($15 billion), and Clear Channel ($ 18.7 billion). Are public markets being eclipsed? Are investors and employees being victimized? Professor Josh Lerner looks at historical trends and current deals to put it all in perspective. Key concepts include: An influx of money on the equity side from pension funds and overseas investors is helping create an explosion of LBOs. Hedge funds have joined banks as major providers of debt, creating a market with more favorable terms for investors. Although there have been deals that have gone sour, the private equity boom can be seen as mostly beneficial for both investors and the companies involved. Closed for comment; 0 Comments.
- 11 Oct 2006
- Research & Ideas
The Success of Reverse Leveraged Buyouts
RLBOs have a bad rap, but Josh Lerner says the reputation is not deserved. Studying almost 500 private equity-led IPOs over a 22-year period, Lerner and co-researcher Jerry Cao conclude that reverse leveraged buyouts in general outperformed other IPOs and the market as a whole. Quick flips, however, are another story. Key concepts include: RLBOs have outperformed other types of IPOs, perhaps because private equity groups prepare their portfolio companies to perform as public companies. RLBOs have performed well across many market cycles. The most successful performances were associated with larger RLBOs, as well as offerings by larger groups. So-called quick flips generally have underperformed the market. Closed for comment; 0 Comments.
- 06 Feb 2006
- Research & Ideas
Sorting Out the Patent Craze
Some companies patent anything that moves to block innovation by competitors. But what does this mean for standard setting organizations? Professor Josh Lerner explains the challenges facing SSOs in this HBS Working Knowledge Q&A. Closed for comment; 0 Comments.
- 20 Dec 2004
- Research & Ideas
The U.S. Patent Game: How to Change It
Innovators and society are paying too high a price in the current patent system, says a new book by Adam B. Jaffe and Harvard Business School’s Josh Lerner. A book excerpt and Q&A with Lerner. Closed for comment; 0 Comments.
The Consequences of Financial Innovation: A Counterfactual Research Agenda
While financial innovation is often praised as a positive force for societal growth, it also takes much of the blame for the recent global financial crisis. In this paper, Harvard Business School professors Josh Lerner and Peter Tufano explore financial innovation and discuss how it differs from other types of innovation. Key concepts include: Financial innovation is defined as the act of creating and then popularizing new financial instruments, as well as new financial technologies, institutions, and markets. Economists initially tended to consider financial innovation in the same way that they consider manufacturing innovation. However, financial innovation differs from other types of new product development in several ways: predicting the social consequences of the innovation can be challenging, due to how interconnected the financial system is; the consequences of the innovation may change over time, due to the dynamic nature of the business; and new financial products and services are especially susceptible to regulation. The researchers suggest several promising approaches for future research. These include using counterfactual "thought experiments" to explore systemic impacts; looking at settings where there are big constraints on financial innovation, such as sharia-compliant financial structures; using experimental techniques; and studying the social impact of financial innovation using the same tools used to analyze the impact of new products. Closed for comment; 0 Comments.