The Journal of Finance

Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies

Published: 1/23/2009,  Volume: 64,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2008.01429.x  |  Cited by: 313

STEVEN N. KAPLAN, BERK A. SENSOY, PER STRÖMBERG

We study how firm characteristics evolve from early business plan to initial public offering (IPO) to public company for 50 venture capital (VC)‐financed companies. Firm business lines remain remarkably stable while management turnover is substantial. Management turnover is positively related to alienable asset formation. We obtain similar results using all 2004 IPOs, suggesting that our main results are not specific to VC‐backed firms or the time period. The results suggest that, at the margin, investors in start‐ups should place more weight on the business (“the horse”) than on the management team (“the jockey”). The results also inform theories of the firm.

Indirect Incentives of Hedge Fund Managers

Published: 3/18/2016,  Volume: 71,  Issue: 2  |  DOI: 10.1111/jofi.12384  |  Cited by: 85

JONGHA LIM, BERK A. SENSOY, MICHAEL S. WEISBACH

Indirect incentives exist in the money management industry when good current performance increases future inflows of capital, leading to higher future fees. For the average hedge fund, indirect incentives are at least 1.4 times as large as direct incentives from incentive fees and managers’ personal stakes in the fund. Combining direct and indirect incentives, manager wealth increases by at least $0.39 for a $1 increase in investor wealth. Younger and more scalable hedge funds have stronger flow‐performance relations, leading to stronger indirect incentives. These results have a number of implications for our understanding of incentives in the asset management industry.

The Effects of Stock Lending on Security Prices: An Experiment

Published: 9/10/2013,  Volume: 68,  Issue: 5  |  DOI: 10.1111/jofi.12051  |  Cited by: 83

STEVEN N. KAPLAN, TOBIAS J. MOSKOWITZ, BERK A. SENSOY

We examine the impact of short selling by conducting a randomized stock lending experiment. Working with a large, anonymous money manager, we create an exogenous and sizeable shock to the supply of lendable shares by taking high loan fee stocks in the manager's portfolio and randomly making available and withholding stocks from the lending market. The experiment ran in two independent phases: the first, from September 5 to 18, 2008, with over $580 million of securities lent, and the second, from June 5 to September 30, 2009, with over $250 million of securities lent. While the supply shocks significantly reduce market lending fees and raise quantities, we find no evidence that returns, volatility, skewness, or bid–ask spreads are affected. The results provide novel evidence on the impact of shorting supply and do not indicate any adverse effects on stock prices from securities lending.

Measuring Institutional Investors’ Skill at Making Private Equity Investments

Published: 6/20/2019,  Volume: 74,  Issue: 6  |  DOI: 10.1111/jofi.12783  |  Cited by: 68

DANIEL R. CAVAGNARO, BERK A. SENSOY, YINGDI WANG, MICHAEL S. WEISBACH

Using a large sample of institutional investors’ investments in private equity funds raised between 1991 and 2011, we estimate the extent to which investors’ skill affects their returns. Bootstrap analyses show that the variance of actual performance is higher than would be expected by chance, suggesting that some investors consistently outperform. Extending the Bayesian approach of Korteweg and Sorensen, we estimate that a one‐standard‐deviation increase in skill leads to an increase in annual returns of between one and two percentage points. These results are stronger in the earlier part of the sample period and for venture funds.

Sorting Out Sorts

Published: 2/2000,  Volume: 55,  Issue: 1  |  DOI: 10.1111/0022-1082.00210  |  Cited by: 143

Jonathan B. Berk

In this paper we analyze the theoretical implications of sorting data into groups and then running asset pricing tests within each group. We show that the way this procedure is implemented introduces a bias in favor of rejecting the model under consideration. By simply picking enough groups to sort into, the true asset pricing model can be shown to have no explanatory power within each group.

Managerial Ability, Compensation, and the Closed‐End Fund Discount

Published: 3/20/2007,  Volume: 62,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2007.01216.x  |  Cited by: 161

JONATHAN B. BERK, RICHARD STANTON

This paper shows that the existence of managerial ability, combined with the labor contract prevalent in the industry, implies that the closed‐end fund discount should exhibit many of the primary features documented in the literature. We evaluate the model's ability to match the quantitative features of the data, and find that it does well, although there is some observed behavior that remains to be explained.

Regulation of Charlatans in High‐Skill Professions

Published: 2/26/2022,  Volume: 77,  Issue: 2  |  DOI: 10.1111/jofi.13112  |  Cited by: 26

JONATHAN B. BERK, JULES H. VAN BINSBERGEN

We model a market for a skill in short supply and high demand, where the presence of charlatans (professionals who sell a service they do not deliver on) is an equilibrium outcome. In the model, reducing the number of charlatans through regulation lowers consumer surplus because of the resulting reduction in competition among producers. Producers can benefit from this reduction, potentially explaining the regulation we observe. The effect on total surplus depends on the type of regulation. We derive the factors that drive the cross‐sectional variation in charlatans (regulation) across professions.

Human Capital, Bankruptcy, and Capital Structure

Published: 5/7/2010,  Volume: 65,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2010.01556.x  |  Cited by: 495

JONATHAN B. BERK, RICHARD STANTON, JOSEF ZECHNER

We derive the optimal labor contract for a levered firm in an economy with perfectly competitive capital and labor markets. Employees become entrenched under this contract and so face large human costs of bankruptcy. The firm's optimal capital structure therefore depends on the trade‐off between these human costs and the tax benefits of debt. Optimal debt levels consistent with those observed in practice emerge without relying on frictions such as moral hazard or asymmetric information. Consistent with empirical evidence, persistent idiosyncratic differences in leverage across firms also result. In addition, wages should have explanatory power for firm leverage.

Optimal Investment, Growth Options, and Security Returns

Published: 10/1999,  Volume: 54,  Issue: 5  |  DOI: 10.1111/0022-1082.00161  |  Cited by: 1113

Jonathan B. Berk, Richard C. Green, Vasant Naik

As a consequence of optimal investment choices, a firm's assets and growth options change in predictable ways. Using a dynamic model, we show that this imparts predictability to changes in a firm's systematic risk, and its expected return. Simulations show that the model simultaneously reproduces: (i) the time‐series relation between the book‐to‐market ratio and asset returns; (ii) the cross‐sectional relation between book‐to‐market, market value, and return; (iii) contrarian effects at short horizons; (iv) momentum effects at longer horizons; and (v) the inverse relation between interest rates and the market risk premium.

Matching Capital and Labor

Published: 8/28/2017,  Volume: 72,  Issue: 6  |  DOI: 10.1111/jofi.12542  |  Cited by: 93

JONATHAN B. BERK, JULES H. van BINSBERGEN, BINYING LIU

We establish an important role for the firm by studying capital reallocation decisions of mutual fund firms. The firm's decision to reallocate capital among its mutual fund managers adds at least $474,000 a month, which amounts to over 30% of the total value added of the industry. We provide evidence that this additional value added results from the firm's private information about the skill of its managers. The firm captures this value because investors reward the firm following a capital reallocation decision by allocating additional capital to the firm's funds.