Paul A. Gompers

Bio: Paul A. Gompers is an academic researcher from Harvard University. The author has contributed to research in topics: Venture capital & Social venture capital. The author has an hindex of 60, co-authored 124 publications receiving 24804 citations. Previous affiliations of Paul A. Gompers include National Bureau of Economic Research.

The venture capital cycle

Abstract: The venture captial industry in the United States has grown dramatically over the last two decades Annual inflows to venture funds have expanded from virtually zero in the mid-1970s to more than US$9 billion in 1997 Many of the most visible new firms -including Apple Computer, Genentech, Intel, Lotus, Microsoft and Yahoo - have been backed by venture capital funds Yet despite this tremendous growth and its visible success, venture capital remains a mysterious industry Numerous misconceptions persist about the nature and role of venture capitalists Paul Gompers and Josh Lerner's extensive research on venture capital organizations is based largely on original data sets developed through close relationships with institutional investors in venture capital funds and investment advisors "The Venture Capital Cycle" synthesizes their path-breaking work After an historical overview, the book looks at the formation of funds, the investment of the funds in operating companies and the liquidation of these investments The concluding chapter provides a road map for future research in this growing area Three themes run throughout the book The first is that all venture capitalists confront tremendous incentive and information problems The second is that because the various stages of the venture capital processes are related, the entire process is best viewed as a cycle The third is that, unlike most financial markets, the venture capital industry adjusts very slowly to shifts in the supply of capital and the demand for financing

Optimal Investment, Monitoring, and the Staging of Venture Capital

Abstract: This paper examines the structure of staged venture capital investments when agency and monitoring costs exist. Expected agency costs increase as assets become less tangible, growth options increase, and asset specificity rises. Data from a random sample of 794 venture capital-backed firms support the predictions. Venture capitalists concentrate investments in early stage and high technology companies where informational asymmetries are highest. Decreases in industry ratios of tangible assets to total assets, higher market-to-book ratios, and greater R&D intensities lead to more frequent monitoring. Venture capitalists periodically gather information and maintain the option to discontinue funding projects with little probability of going public.

Institutional Investors and Equity Prices

Abstract: We analyze institutional investors' preferences for stocks and the implications that these preferences have for stock-market prices and returns. We find that -- a category including all managers with greater than $100 million under discretionary control -- have nearly doubled their share of the common-stock market from 1980 to 1996 most of this increase driven by the growth in holdings of the largest one-hundred institutions. Large institutions, when compared with other investors, prefer stocks that have greater market capitalizations, are more liquid, and have higher book-to-market ratios and lower returns for the previous year. We discuss how institutional preferences, when combined with the rising share of the market held by institutions, induce changes in the relative prices and returns of large stocks and small stocks. We provide evidence to support the in-sample implications for prices and realized returns and we derive out-of-sample predictions for expected returns.

The Venture Capital Revolution

Abstract: V T enture capital has developed as an important intermediary in financial markets, providing capital to firms that might otherwise have difficulty attracting financing. These firms are typically small and young, plagued by high levels of uncertainty and large differences between what entrepreneurs and investors know. Moreover, these firms typically possess few tangible assets and operate in markets that change very rapidly. Venture capital organizations finance these high-risk, potentially high-reward projects, purchasing equity or equity-linked stakes while the firms are still privately held. The venture capital industry has developed a variety of mechanisms to overcome the problems that emerge at each stage of the investment process. At the same time, the venture capital process is also subject to various pathologies from time to time, which can create problems for investors or entrepreneurs. The primary focus of this article is on drawing together the empirical academic research on venture capital and highlighting what is still not known. With this focus in mind, four limitations should be acknowledged at the outset. First, this paper will not address the many theoretical papers that examine various aspects of the venture capital market, much of it examining the role that venture capitalists play in mitigating agency conflicts between entrepreneurial firms and outside investors.' Second, this article does not focus on the intricacies of the

Myth or Reality? The Long‐Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital‐Backed Companies

Abstract: We investigate the long-run underperformance of recent initial public offering (IPO) firms in a sample of 934 venture-backed IPOs from 1972-1992 and 3,407 nonventurebacked IPOs from 1975-1992 We find that venture-backed IPOs outperform nonventure-backed IPOs using equal weighted returns Value weighting significantly reduces performance differences and substantially reduces underperformance for nonventure-backed IPOs In tests using several comparable benchmarks and the Fama-French (1993) three factor asset pricing model, venture-backed companies do not significantly underperform, while the smallest nonventure-backed firms do Underperformance, however, is not an IPO effect Similar size and book-to-market firms that have not issued equity perform as poorly as IPOs RITTER (1991) AND LOUGHRAN and Ritter (1995) document severe underperformance of initial public offerings (IPOs) during the past twenty years suggesting that investors may systematically be too optimistic about the prospects of firms that are issuing equity for the first time Recent work has shown that underperformance extends to other countries as well as to seasoned equity offerings We address three primary issues related to the underperformance of new issues First, we examine whether venture capitalists, who specialize in financing promising startup companies and bringing them public, affect the long-run performance of newly public firms We find that venture-backed firms do indeed outperform nonventure-backed IPOs over a five-year period, but only when returns are weighted equally

Investor Psychology and Security Market Under- and Overreactions

Abstract: We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors’ confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations ~“momentum”!, short-run earnings “drift,” but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy. IN RECENT YEARS A BODY OF evidence on security returns has presented a sharp challenge to the traditional view that securities are rationally priced to ref lect all publicly available information. Some of the more pervasive anomalies can be classified as follows ~Appendix A cites the relevant literature!: 1. Event-based return predictability ~public-event-date average stock returns of the same sign as average subsequent long-run abnormal performance! 2. Short-term momentum ~positive short-term autocorrelation of stock returns, for individual stocks and the market as a whole!

The Provision of Incentives in Firms

Abstract: I NCENTIVES ARE the essence of economics. Despite many wide-ranging claims about their supposed importance, there has been little empirical assessment of incentive provision for workers. The purpose of this paper is to critically overview existing work on the provision of incentives. Since the interests of workers and their employers are not always aligned, a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm's interest. This literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers. These include piece rates, options, discretionary bonuses, promotions, profit sharing, efficiency wages, deferred compensation, and so on. My objective here is to evaluate this literature in the light of a growing empirical literature on compensation. Where possible, I will address the literature from two perspectives. First, an underlying assumption of this literature is that individuals respond to contracts that reward performance. Accordingly, I consider whether agents behave in this way, and whether these responses are always in the firm's interest. Second, I address whether firms write contracts with these responses in mind. In other words, do contracts look like the predictions of the theory? Incentives are provided to workers

Presentation Slides for 'Investor Psychology and Security Market Under and Overreactions'

Abstract: We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations (momentum), short-run earnings drift, but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy. Prepublication version available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2017

Overcoming the Liability of Foreignness

Abstract: This study addressed the question of whether firms in a competitive, globally integrated environment face a “liability of foreignness” and to what extent either importing home-country organizational capabilities or copying the practices of successful local firms can help them overcome this liability. Predictions were tested with a paired sample of 24 foreign exchange trading rooms of major Western and Japanese banks in New York and Tokyo. Results support the existence of a liability of foreignness and the role of a firm's administrative heritage in providing competitive advantage to its multinational subunits. They also highlight the difficulty firms face in copying organizational practices from other firms.