When Entrepreneurs Meet Financiers: Evidence from the Business Angel Market

Angela, Cipollone and Paolo E., Giordani (2016): When Entrepreneurs Meet Financiers: Evidence from the Business Angel Market.

Abstract

This paper estimates the process of search and matching between entrepreneurs and financiers in the business angel (BA) market. We hand-collect a new dataset from the BA markets of 17 developed countries for the period 1996-2014, and we estimate the aggregate matching function, which captures the number of successful deals as a function of the number of potential entrepreneurs and of business angels. Empirical findings confirm the technological features assumed in the theoretical literature: positive and decreasing marginal returns to both inputs (stepping on toes effect), technological complementarity across the two inputs (thick market effect) and constant returns to scale (CRS). As we show, evidence on CRS rules out equilibrium multiplicity in the BA market. We discuss the policy implications of these findings.

• Item Type: MPRA Paper
• Language: English
• Keywords: Entrepreneurial finance, innovation, matching function, business angels.
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C78 - Bargaining Theory ; Matching Theory; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L26 - Entrepreneurship; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights

References

Boadway, R., O. Secrieru and M. Vigneault (2005). "A Search Model of Venture Capital, Entrepreneurship, and Unemployment". Working Paper 05-24, Bank of Canada.

Chemmanur, T. and P. Fulghieri (2014). "Entrepreneurial Finance and Innovation: An Introduction and Agenda for Future Research". The Review of Financial Studies, 27 (Special Issue "Entrepreneurial Finance and Innovation"), pp. 1-19.

Chiu, J., C. Meh, and R. Wright (2011). "Innovation and Growth with Financial, and other, Frictions", NBER Working Paper no. 17512.

Cipollone, A. and P.E. Giordani (2015). "Market Frictions in Entrepreneurial Innovation: Theory and Evidence". LUISS, mimeo.

Diamond, P. (1982). "Aggregate Demand Management in Search Equilibrium". Journal of political Economy, 90, pp. 881-894.

Diamond, P. (1984). "Money in Search Equilibrium". Econometrica, vol. 52(1), pp. 1-20.

Gompers, P.A. and J. Lerner (1999). "The Venture Capital Cycle". MIT Press, Cambridge, MA.

Hamilton, L. C. (1991). "How robust is robust regression?". Stata Technical Bulletin, 2, pp. 21--26, College Station, TX: Stata Press.

Hosios, A. (1990). "On the efficiency of matching and related models of search and unemployment". Review of Economic Studies 57, 279-298.

Inderst, R. and H. Muller (2004). "The Effect of Capital Market Characteristics on the Value of Start-up Firms". Journal of Financial Economics, 72, pp. 319-56.

Kangasharju, A., J. Pehkonen and S. Pekkala (2005). "Returns to scale in a matching model: evidence from disaggregated panel data". Applied Economics, 37(1), pp. 115-118.

Keuschnigg, C. (2003). "Optimal Public Policy for Venture Capital backed Innovation". CEPR Discussion Paper No. 3850.

Kmenta, J. (1967). "On Estimation of the CES Production Function". International Economic Review, 8, pp. 180-189.

Lerner, J. (2010). "Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed and What to Do About It". Princeton University Press, Princeton, NJ.

Lerner, J., A. Schoar, S. Sokolinski, and K. Wilson (2015). "The Globalization of Angel Investments". Bruegel Working Paper Series, 2015/09.

Mazzucato, M. (2013). "The Entrepreneurial State: debunking public vs. private sector myths". Anthem Press: London, UK.

Michelacci, C. and J. Suarez (2004). "Business Creation and the Stock Market". Review of Economic Studies, 71, pp. 459-481.

OECD (2011). "Financing High-Growth Firms: The Role of Angel Investors". OECD Publishing.

Parker, S. (2009). "The Economics of Entrepreneurship". Cambridge (UK): Cambridge University Press.

Petrongolo, B., and C.A. Pissarides (2001). "Looking into the Black Box: A Survey of the Matching Function." Journal of Economic Literature, 39(2): 390--431.

Phelps, E. (2009). "Toward a Model of Innovation and Performance Along the Lines of Knight, Keynes, Hayek and M. Polanyi". In Z. Acs, D. Audretsch and R. Strom (Eds), Entrepreneurship, Growth and Public Policy, Cambridge University Press, Cambridge.

Rogerson, R., R. Shimer, and R. Wright (2005). "Search-Theoretic Models of the Labor Market: A Survey". Journal of Economic Literature, Vol. XLIII, pp. 959--988.

Rousseeuw, P. J. and A. Leroy (1987). "Robust Regression and Outlier Detection". New York: John Wiley and Sons.

Rousseeuw, P. J. and B. Van Zomeren (1990). "Unmasking Multivariate Outliers and Leverage Points", Journal of the American Statistical Association, 85, 633-639.

Silveira, R. and R. Wright (2010). "Search and the Market for Ideas". Journal of Economic Theory, 145(4), 1550-1573.

Silveira, R. and R. Wright (2016). "Venture Capital: A Model of Search and Bargaining". Review of Economic Dynamics, forthcoming.

Warren, R. S. (1996). "Returns to Scale in a Matching Model of the Labour Market". Economics Letters, 50(1), 135-142.

Yashiv, E. (2000). "The Determinants of Equilibrium Unemployment". American Economic Review, 90(5), 1297-1322.