The Journal of Finance

Where Does State Street Lead? A First Look at Finance Patents, 1971 to 2000

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00446

Josh Lerner

This paper empirically examines patents for financial formulas and methods, whose patentability was recently confirmed in the litigation between State Street Bank and Trust and Signature Financial Group. The number of such filings and awards has been accelerating. Patent filings by academics have been very infrequent, which appears to be a consequence of a lack of awareness or interest on the part of faculty members, rather than any fundamental unsuitability of their research for patenting. The failure to cite academic research in this area appears to be problematic and may reflect patent examiners' limited exposure to finance research and patents.

Venture Capitalists and the Oversight of Private Firms

Published: 03/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb05175.x

JOSH LERNER

This article examines the representation of venture capitalists on the boards of private firms in their portfolios. If venture capitalists are intensive monitors of managers, their involvement as directors should be more intense when the need for oversight is greater. I show that venture capitalists' representation on the board increases around the time of chief executive officer turnover, while the number of other outsiders remains constant. I also show that distance to the firm is an important determinant of the board membership of venture capitalists, as might be anticipated if the oversight of local firms is less costly than more distant businesses.

Venture Capital Distributions: Short‐Run and Long‐Run Reactions

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00086

Paul Gompers, Josh Lerner

Venture capital distributions, a legal form of insider trading, provides an ideal arena for examining the share price impact of transactions by informed parties. These sales, which occur after substantial run‐ups in share value, generate a substantial price reaction immediately around the event. In the months after distribution, returns apparently continue to be negative. When the short‐ and long‐run reactions are decomposed, they are consistent with the view that venture capitalists use inside information to time stock distributions: Distributions of firms brought public by lower quality underwriters and of less seasoned firms have more negative price reactions.

The Really Long‐Run Performance of Initial Public Offerings: The Pre‐Nasdaq Evidence

Published: 07/15/2003   |   DOI: 10.1111/1540-6261.00570

Paul A. Gompers, Josh Lerner

Financial economists have intensely debated the performance of IPOs using data after the formation of Nasdaq. This paper sheds light on this controversy by undertaking a large, out‐of‐sample study: We examine the performance for five years after listing of 3,661 U.S. IPOs from 1935 to 1972. The sample displays some underperformance when event‐time buy‐and‐hold abnormal returns are used. The underperformance disappears, however, when cumulative abnormal returns are utilized. A calendar‐time analysis shows that over the entire period, IPOs return as much as the market. The intercepts in CAPM and Fama–French regressions are insignificantly different from zero, suggesting no abnormal performance.

Private Equity and Long‐Run Investment: The Case of Innovation

Published: 03/21/2011   |   DOI: 10.1111/j.1540-6261.2010.01639.x

JOSH LERNER, MORTEN SORENSEN, PER STRÖMBERG

A long‐standing controversy is whether leveraged buyouts (LBOs) relieve managers from short‐term pressures from public shareholders, or whether LBO funds themselves sacrifice long‐term growth to boost short‐term performance. We examine one form of long‐run activity, namely, investments in innovation as measured by patenting activity. Based on 472 LBO transactions, we find no evidence that LBOs sacrifice long‐term investments. LBO firm patents are more cited (a proxy for economic importance), show no shifts in the fundamental nature of the research, and become more concentrated in important areas of companies' innovative portfolios.

Smart Institutions, Foolish Choices: The Limited Partner Performance Puzzle

Published: 03/20/2007   |   DOI: 10.1111/j.1540-6261.2007.01222.x

JOSH LERNER, ANTOINETTE SCHOAR, WAN WONGSUNWAI

The returns that institutional investors realize from private equity differ dramatically across institutions. Using detailed, hitherto unexplored records, we document large heterogeneity in the performance of investor classes: endowments' annual returns are nearly 21% greater than average. Analysis of reinvestment decisions suggests that endowments (and to a lesser extent, public pensions) are better than other investors at predicting whether follow‐on funds will have high returns. The results are not primarily due to endowments' greater access to established funds, since they also hold for young or undersubscribed funds. Our results suggest that investors vary in their sophistication and potentially their investment objectives.

Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986 to 1999

Published: 03/02/2005   |   DOI: 10.1111/j.1540-6261.2005.00740.x

PAUL GOMPERS, JOSH LERNER, DAVID SCHARFSTEIN

We examine two views of the creation of venture‐backed start‐ups, or “entrepreneurial spawning.” In one, young firms prepare employees for entrepreneurship, educating them about the process, and exposing them to relevant networks. In the other, individuals become entrepreneurs when large bureaucratic employers do not fund their ideas. Controlling for firm size, patents, and industry, the most prolific spawners are originally venture‐backed companies located in Silicon Valley and Massachusetts. Undiversified firms spawn more firms. Silicon Valley, Massachusetts, and originally venture‐backed firms typically spawn firms only peripherally related to their core businesses. Overall, entrepreneurial learning and networks appear important in creating venture‐backed firms.