Is There a Trade-off Between Protecting Investors and Promoting Entrepreneurial Activity? Evidence from Angel Financing

Jiajie Xu

Journal of Financial and Quantitative Analysis, 2023, vol. 58, issue 8, 3305-3341

Abstract: This article studies how changes in investor protection regulations affect local entrepreneurial activity, relying on the heterogeneous impact of a 2011 SEC regulation change on the definition of accredited investors across U.S. cities. Using a difference-in-differences approach, I show that cities more affected by the regulation change experienced a significantly larger decrease in local angel financing, entrepreneurial activity, innovation output, employment, and sales. I find that small business loans and second-lien mortgages became entrepreneurs’ partial substitutes for angel investment. My cost-benefit analysis suggests that the costs of protecting angel investors through the 2011 regulation change outweigh its benefits.

Date: 2023
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