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Entrepreneurship Working Group.

The NBER's Entrepreneurship Working Group met in Cambridge on March 10. NBER Research Associate Josh Lerner of the Harvard Business School, who directs this group, organized the following program:

Entrepreneurship in the Service Sector

Francine Lafontaine, University of Michigan, and Renata Kosova, George Washington University, "Firm Survival and Growth in Retail and Service Industries: Evidence from Franchised Chains"

Discussant: Eric Van Den Steen, MIT

Iain M. Cockburn, Boston University and NBER, and Stefan Wagner, INNO-tech, "Patents and the Survival Of Internet-Related IPOs"

Discussant: Baruch Lev, New York University

David G. Blanchflower, Dartmouth College and NBER, and Jon Wainwright, NERA Economic Consulting, "An Analysis of the Impact of Affirmative Action Programs on Self-Employment in the Construction Industry" (NBER Working Paper No. 11793)

Discussant: Scott Wallsten, AEI-Brookings Joint Center for Regulatory Studies

Entrepreneurial Finance

Antoinette Schoar, MIT and NBER, "Judge Specific Differences in Chapter 11 and the Effect on Firm Outcomes?" Discussant: Karin Thorburn, Dartmouth College

Robert W. Fairlie, University of California, Santa Cruz, and Harry A. Krashinsky, University of Toronto, "Liquidity Constraints, Household Wealth, and Entrepreneurship Revisited"

Discussant: Annamaria Lusardi, Dartmouth College and NBER

Boyan Jovanovic, New York University and NBER, and Balazs Szentes, University of Chicago, "An Estimated Model of the Market for Venture Capital"

Discussant: Lucy White, Harvard University

Kosova and Lafontaine analyze the survival and growth of franchised chains using an unbalanced panel data set that covers about 1000 franchised chains each year from 1980 to 2001. The empirical literature on firm survival and growth has focused almost exclusively on manufacturing. This analysis allows the authors to explore whether chain age and size have the same effect on the survival and growth of retail and service chains as firm and establishment age and size have been found to have on survival and growth in manufacturing. In addition, while the researchers focus on the effect of age and size as the prior literature has done, their large and long panel data set allows them to control for the first time for chain-specific effects as well as for other chain characteristics that might affect chain survival and growth. They find that controlling for chain-level unobserved heterogeneity is statistically warranted, and affects the conclusions they reach on the effect of chain age and size in our regressions. They also find that other chain characteristics affect the survival and growth of individual chains. Finally, their long panel allows them to examine a subsample of mature chains, for which they find that age and size no longer affect exit. However, they find that chain size continues to have a negative effect on chain growth, a result that implies that chains converge in size to chain-specific levels.

Cockburn and Wagner examine the effect of patenting on the survival prospects of 356 internet-related firms that made an initial public offering on the NASDAQ at the height of the stock market bubble of the late 1990s. By March 2005, almost two thirds of these firms had delisted from the exchange. Changes in the legal environment in the United States in the 1990s made it much easier to obtain patents on software, and ultimately, on business methods, although less than half of the firms in the sample obtained, or attempted to obtain, patents. For those that did, the authors hypothesize that patents conferred competitive advantages that translated into higher probability of survival, although they may also simply have been a signal of firm quality. Controlling for other determinants of firm survival, such as age, venture-capital backing, financial characteristics, and stock market conditions, patenting is positively associated with survival. Quite different processes appear to govern exit via acquisition compared to exit via delisting from the exchange because of business failure. Firms that applied for more patents were less likely to be acquired, although if they obtained unusually highly cited patents, they meght be a more attractive acquisition target. These findings do not hold true for business method patents, which do not appear to confer a survival advantage.

Blanchflower and Wainwright find that despite the existence of various affirmative action programs designed to improve the position of women and minorities in public construction, little has changed in the last 25 years. They show that where race-conscious affirmative action programs exist, they appear to generate significant improvements: when these programs are removed or replaced with race-neutral programs, the utilization of minorities and women in public construction declines rapidly. They also show that the programs have not helped minorities to become self-employed or to raise their earnings over the period 1979-2004, using data from the Current Population Survey and the Census, but have improved the position of white females. There has been a growth in incorporated self-employment rates of white women in construction such that currently their rate is significantly higher than that of white men. The data are suggestive of the possibility that some of these companies are "fronts" which are actually run by their white male spouses or sons to take advantage of the affirmative action programs.

Schoar uses information on Chapter 11 filings for almost 5000 private companies across five district courts in the United States between 1989 and 2003. For each case, she codes the entire docket, in particular all of the decisions that the judge made during a Chapter 11 process. She first establishes that while there are some significant differences across districts in the types of firms that file for Chapter 11, within districts, cases appear to be assigned randomly to judges. She then estimates judge-specific fixed effects to analyze whether judges differ systematically in their Chapter 11 rulings. She finds very strong and economically significant differences across judges in their propensity to grant or deny specific motions. Some judges appear to rule persistently more favorably towards allowing the use of cash collateral, lifting the automatic stay, or conversion of cases into other chapters, such as 7. Next, she uses the estimated judge fixed effects to instrument for the exogenous variation in the propensity to grant a specific motion. She shows that the use of cash collateral and the extension of the exclusivity period increase a firm's likelihood of re-filing for bankruptcy. Finally, based on the judge fixed effects, she also creates an aggregate index to measure the pro-debtor (pro-creditor) friendliness of the judges. She provides suggestive evidence that a pro-management bias leads to increased rates of re-filing and lower post-bankruptcy credit ratings.

Hurst and Lusardi (2004) recently challenged the long-standing belief that liquidity constraints are important causal determinants of entry into self-employment. They demonstrated that the oft-cited positive relationship between entry rates and assets is actually unchanging as assets increase from the first to the 95th percentile of the asset distribution, but rise drastically after this point. They also applied a new instrument, unanticipated changes in house prices, for wealth in the entry equation, and showed that instrumented wealth is not a significant determinant of entry. Fairlie and Krashinsky reinterpret these findings: first, they demonstrate that bifurcating the sample into workers who enter self-employment after job loss and those who do not reveals steadily increasing entry rates as assets increase in both subsamples. They argue that these two groups merit a separate analysis, because a careful examination of the entrepreneurial choice model of Evans and Jovanovic (1989) reveals that the two groups face different incentives, and thus have different solutions to the entrepreneurial decision. Second, they use micro-data from matched Current Population Surveys (1993-2004) to demonstrate that unanticipated housing appreciation measured at the MSA-level is a significantly positive determinant of entry into self-employment. In addition, they perform a duration analysis to demonstrate that pre-entry assets are an important determinant of entrepreneurial longevity.

Jovanovic and Szentes model the market for venture capital. VCs have the expertise to assess the profitability of projects, and have liquidity to finance them. The scarcity of VCs enables them to internalize their social value, so that the competitive equilibrium is socially optimal. This optimality obtains on an open set of parameter values. The scarcity of VCs also leads to an equilibrium return on venture capital higher than the market rate, but the preliminary estimates here show this excess return to be negligible. The ability to earn higher returns makes VCs less patient when waiting for a project to succeed; this explains why companies backed by venture capitalists reach IPOs earlier than other start-ups and why they are worth more at IPO.
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Title Annotation:Bureau News
Publication:NBER Reporter
Date:Jun 22, 2006
Previous Article:National Security Working Group.
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