Person: Rhodes-Kropf, Matthew
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Rhodes-Kropf
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Matthew
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Rhodes-Kropf, Matthew
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Publication The Price of Diversifiable Risk in Venture Capital and Private Equity(Oxford University Press (OUP), 2013) Ewens, Michael; Jones, Charles; Rhodes-Kropf, MatthewThis paper explores the private equity and venture capital (VC) markets and extends the standard principal-agent problem between the investors and venture capitalist to show how it alters the interaction between the venture capitalist and the entrepreneur. Since the investor-VC contract is set before the VC finds any investments, we show that it is the entrepreneur who must compensate the venture capitalist for any extra risk in the project even though it is the investor who requires the VC to hold the risk and even though the entrepreneur holds all of the market power in the model. Furthermore, although perfectly competitive investors expect zero alpha in equilibrium, the nature of the three way interaction results in a correlation between total risk and investor returns even net of fees. Thus, we show how and why diversifiable risk should be priced in VC deals even though investors are fully diversified. We then take our theory to a unique data set and show that while investors do earn zero alpha on average there is a strong correlation between realized risk and investor returns, exactly as predicted by the theory.Publication Governance and CEO Turnover: Do Something or Do the Right Thing?(INFORMS, 2014) Fisman, Ray; Khurana, Rakesh; Rhodes-Kropf, Matthew; Yim, SoojinWe study how corporate governance affects firm value through the decision of whether to fire or retain the CEO. We present a model in which weak governance—which prevents shareholders from controlling the board—protects inferior CEOs from dismissal, while at the same time insulates the board from pressures by biased or uninformed shareholders. Whether stronger governance improves retain/replace decisions depends on which of these effects dominates. We use our theoretical framework to assess the effect of governance on the quality of firing and hiring decisions using data on the CEO dismissals of large U.S. corporations during 1994–2007. Our findings are most consistent with a beneficent effect of weak governance on CEO dismissal decisions, suggesting that insulation from shareholder pressure may allow for better long-term decision making.Publication Is a VC Partnership Greater Than the Sum of Its Partners?(Wiley-Blackwell, 2015) Ewens, Michael; Rhodes-Kropf, MatthewThis paper investigates whether individual venture capitalists have repeatable investment skill and to what extent their skill is impacted by the VC firm where they work. We examine a unique dataset that tracks the performance of individual venture capitalists' investments across time and as they move between firms. We find evidence of skill and exit style differences even among venture partners investing at the same VC firm at the same time. Furthermore, our estimates suggest the partner's human capital is two to five times more important than the VC firm's organizational capital in explaining performance.Publication Entrepreneurship as Experimentation(American Economic Association, 2014) Kerr, William; Nanda, Ramana; Rhodes-Kropf, MatthewEntrepreneurship research is on the rise, but many questions about its fundamental nature still exist. We argue that entrepreneurship is about experimentation: the probabilities of success are low, extremely skewed, and unknowable until an investment is made. At a macro level, experimentation by new firms underlies the Schumpeterian notion of creative destruction. However, at a micro level, investment and continuation decisions are not always made in a competitive Darwinian contest. Instead, a few investors make decisions that are impacted by incentive, agency, and coordination problems, often before a new idea even has a chance to compete in a market. We contend that costs and constraints on the ability to experiment alter the type of organizational form surrounding innovation and influence when innovation is more likely to occur. These factors not only govern how much experimentation is undertaken in the economy, but also the trajectory of experimentation, with potentially very deep economic consequences.