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How Does Human Capital Matter? Evidence from Venture Capital

Published online by Cambridge University Press:  28 August 2020

Lifeng Gu ,
Ruidi Huang ,
Yifei Mao  and
Xuan Tian
Lifeng Gu
Affiliation:
University of Hong Kong oliviagu@hku.hk
Ruidi Huang
Affiliation:
Southern Methodist University Cox School of Business ruidih@smu.edu
Yifei Mao
Affiliation:
Cornell University SC Johnson College of Business ym355@cornell.edu
Xuan Tian*
Affiliation:
Tsinghua University PBC School of Finance
*
tianx@pbcsf.tsinghua.edu.cn (corresponding author)
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Abstract

We examine the effect of labor mobility on venture capital (VC) investment. Following the staggered adoption of the inevitable disclosure doctrine that restricts labor mobility, VCs are less likely to invest in affected states. This effect is more pronounced when human capital is more important to startups, when VC investment is more uncertain, and when VCs’ monitoring costs are higher. The reduced innovation productivity of employees is a plausible underlying mechanism. To mitigate this adverse effect, VCs stage finance startups more and syndicate more with other VCs. Our paper sheds new light on the real effects of labor market frictions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 6 , September 2022 , pp. 2063 - 2094
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank Philip Dybvig, Dirk Hackbarth, Jarrad Harford (the editor), Josh Lerner, Roni Michaely, Matthew Serfling (the referee), Shan Tin, Michael Weisbach, Hong Zou, conference participants at the 2018 China International Conference in Finance, and the 2018 Sun Yat-Sen University Finance International Conference for helpful comments. Mao acknowledges financial support from the Renata and Alexander Weiss Sesquicentennial Faculty Fellowship from Cornell University. Tian acknowledges financial support from the National Natural Science Foundation of China (Grant Nos. 71790591, 71825002, and 91746301) and the Beijing Outstanding Young Scientist Program (BJJWZYJH 01201910003014). We remain responsible for any errors and omissions.

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