January 11th: Laura Lindsey

Mistake-based Discrimination in Early-stage Finance: Evidence from Security Choice [Register] by Laura Lindsey (ASU) and Luana Zaccaria (EIEF) [pdf]

Motivated by new stylized facts from Form D financings, we develop a simple framework in which security choice in early firm financing depends on the entrepreneurial talent contri- bution to firm value relative to capital, which investors may perceive with bias. Observed outcomes are not subject to such bias. Consistent with our model, female-led firms are more likely to use debt funding in early stages and exit at least as successfully as firms without a female founder, with a greater proportion of IPO exits. Female-led firms also have larger boards of directors at the initial stages, indicative of greater monitoring. The early differences in financing and monitoring subside in later rounds, suggesting that bias declines as information is produced. We argue that investors tend to under (over) estimate the human (physical) capital contribution to total firm value in female-led startups, offering new insight into the gender financing gap.