Finance Seminar with Juanita Gonzalez-Uribe, LSE

The Department of Finance is proud to announce the upcoming seminar with Juanita Gonzalez-Uribe, London School of Economics.

Juanita Gonzalez-Uribe will present

How Sensitive is Entrepreneurial Investment to the Cost of Outside Equity?
Evidence from a UK Tax Relief

Authors:
Juanita Gonzalez-Uribe, London School of Economics
Daniel Paravisini, London School of Economics

ABSTRACT
We estimate the sensitivity of entrepreneurial investment to the cost of equity. We use variation in access to tax relief programs for individual equity investors in the UK as a source of exogenous variation in the cost of outside equity for entrepreneurial firms. We examine firms that became eligible to the programs in 2012, and firms of similar size that were excluded. We find evidence of very limited take-up: only 1% of eligible firms issue new equity. However, conditional on take-up, firms max out the program’s equity issuance quota and invest twice (five times) as much in fixed (total) assets. Our findings suggest there are substantial frictions in entrepreneurial markets: in a frictionless market all firms would have adjusted their investment until marginal productivity equals the cost of capital. We cut the data in several ways to explore the nature of such frictions. We find suggestive evidence that some of these frictions are financial (e.g., costly search, illiquidity, non-pecuniary benefits of control). Using back-of-the-envelope calculations, we estimate that the frictions in entrepreneurial markets are such that investors are willing to forgo an estimated 6pp subsidy in equity investment. In the absence of these frictions, the sensitivity of entrepreneurial investment to the cost of outside equity would have been at least 4 times larger.