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uh firms reach out to external financial markets for additional capital throughout their life cycles. At the
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very early stage, it is venture capitalists that provide both guidance and capital to young entrepreneurs. At
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the later stage, big private equity firms and public markets provide additional financing for more mature
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firms. External financing is crucial for the firm's growth. It allows financially
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constrained entrepreneurs to develop and later bring their uh new ideas to the market. It also allows public mature
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companies to invest into new and profitable projects. However, external financing is
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costly due to the problem known as adverse selection. In short, investors are willing to provide financing on
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terms that reflect expected or the average firm quality. This implies that issuances of firms that are better than
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average will uh might be underpriced. This problem is particularly pronounced for the firms uh that either have no
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history of cash flows or no tangible assets such as startups at the very early stage of development.
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Entrepreneurs on the other hand have better information about both their own abilities and the quality of these
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ideas. This makes the market for venture capital financing a great laboratory for
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analyzing adverse selection. So in my research I ask the question how uh does the quality of projects that receive
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financing and the liquidity in this funding market response to the exogenous changes in the cost of investors
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capital. In other words, I analyze how the projects that raise funds in hot markets are different from those that
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raise funds in cold markets and how the fundraising process itself differs across the two market conditions.
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The key takeaway is that in cold market conditions, entrepreneurs and firms with
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projects above the average quality strategically delay their fundraising decisions. This delay serves as an
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informative signal for investors and allows the companies to secure better terms of financing at a later date.
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The worst quality firms on the other hand prefer to raise funds earlier albe at the less attractive prices. In
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contrast, in the hot market conditions, both high and low quality firms raise funds immediately regardless of the
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quality. This pooling of high and low firms together results in the overpricing of the letter and attracts
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more lowquality firms to the market. Another interesting finding of this research is that firms and entrepreneurs
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strongly react to changes in the investment conditions. For example, a decline in the investors cost of
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capital decreases the incentives of entrepreneurs to strategically delay their fundraising and signal their type.
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This triggers a wave of high quality deals at the onset of hot markets. In the public debate about the optimal
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size of say venture capital industry, the most popular arguments tends to focused on the negative consequences of
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the hot market conditions, namely on millions of dollars spent on unprofitable ventures. My research shows
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that indeed tighter market conditions do deter some entrepreneurs with lowquality
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projects from entering the market. However, they also create disturbances at the higher end of the uh quality.
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Namely, it is the entrepreneurs and firms with very high quality projects that delay their fundraising or even
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forgo the projects altogether. Thus, any uh policy aiming at regulating such markets has to take
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into account both inefficiencies arising in cold and hot markets at the same time.
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Well, the most natural follow-up to my research on capital markets with adverse selection is actually to directly
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analyze possible policy regulations aiming to reduce inefficiencies in these markets. And theoretical model allows me
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not only to analyze the direct consequences of such policies but also to take into account for the unintended
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consequences that arise from the equilibrium response of market uh market participants on such regulations.
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Another interesting venue would be to think deeper about designing strategic information
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environments instead of taking them as given. For example, one can think about the stress test of banks as additional
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information that regulators provide to the public and to the market participants in order to affect their
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beliefs about the stability of the financial system. The natural questions here concerns about the structure of the
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such signals and their optimal timing of those [Music]