Essays on entrepreneurship and closely-held firms

This thesis contains three essays on entrepreneurship and close-held firms. The first essay examines the feedback role of crowdfunding, a new financing method that allows entrepreneurs to raise finance online directly from the public. Using a novel dataset from Kickstarter, I show that crowdfunding outcome signals to entrepreneurs the product market potential of their projects and guides entrepreneurs’ subsequent commercialization decisions. Exploiting weather-induced variation in pledged funds within unfunded projects (which receive no financing), I find that entrepreneurs who received more pledging are more likely to complete and commercialize their projects. Consistent with the real option value of crowdfunding feedback, entrepreneurs on Kickstarter launch riskier projects when crowdfunding becomes more costly relative to alternative financing. These results highlight the role of crowdfunding in improving the information environment faced by early-stage entrepreneurs. The second essay, co-authored with Jan Bena, studies how product market competition affects firms’ ownership structures. Using a large sample of closely held firms in eighteen European countries, we show that firms operating in more competitive environments have lower inside ownership and that the stakes of their outside shareholders are more dispersed. These results are explained by competition increasing the need to raise external equity and reducing private control benefits. Our findings suggest that, by changing corporate ownership structure, competition mitigates incentive misalignment among shareholders, leading to better firm performance and gains in economic efficiency. The third essay studies the effect of shareholder excess control rights on creditors. I show that excess control rights can benefit creditors despite its negative effect previously documented on minority shareholders. Using a sample of U.S. dual-class firms, I find that dual-class firms take less business and financial risk than similar single-class firms, consistent with controlling insiders’ emphasis on long-term survival to access ongoing private benefits of control. Such risk avoidance translates into lower borrowing costs for dual-class firms. Further, lenders seem to be able to use specific covenants to prevent potential expropriations by controlling insiders. These results suggest that the overall effect of excess control rights on firm value may not be as negative as we previously thought.Business, Sauder School ofFinance, Division ofGraduat