Richard Townsend

Publications

How do Consumers Fare when Dealing with Debt Collectors? Evidence from
Out-of-Court Settlements
(with Ing-Haw Cheng and Felipe Severino), Review of Financial Studies, Forthcoming

Do Household Wealth Shocks Affect Productivity? Evidence from Innovative Workers During the Great Recession
(with Shai Bernstein and Timothy McQuade), Journal of Finance, Forthcoming

Are Early Stage Investors Biased Against Women?
(with Michael Ewens), Journal of Financial Economics, Forthcoming

How Do Quasi-Random Option Grants Affect CEO Risk-Taking?
(with Kelly Shue), Journal of Finance, 2017, 76(6): 2551-2588

Growth through Rigidity: An Explanation of the Rise in CEO Pay (Lead Article)
(with Kelly Shue), Journal of Financial Economics, 2017, 123(1): 1-21
JFE Jensen Prize for Best Papers in Corporate Finance and Organizations (2nd Prize)

The Impact of Venture Capital Monitoring
(with Shai Bernstein and Xavier Giroud), Journal of Finance, 2016, 71(4): 1591-1622

Propagation of Financial Shocks: The Case of Venture Capital
Management Science, 2015, 61(11): 2782-2802

Working Papers

Financial Distancing: How Venture Capital Follows the Economy Down and Curtails Innovation
(with Sabrina Howell, Josh Lerner, and Ramana Nanda)

Although late-stage venture capital (VC) activity did not change dramatically in the first two months after the COVID-19 pandemic reached the U.S., early-stage VC activity declined by 38%. The particular sensitivity of early-stage VC investment to market conditions--which we show to be common across recessions spanning four decades from 1976 to 2017--raises questions about the pro-cyclicality of VC and its implications for innovation, especially in light of the common narrative that VC is relatively insulated from public markets. We find that the implications for innovation are not benign: innovation conducted by VC-backed firms in recessions is less highly cited, less original, less general, and less closely related to fundamental science. These effects are more pronounced for startups financed by early-stage venture funds. Given the important role that VC plays in financing breakthrough innovations in the economy, our findings have implications for the broader discussion on the nature of innovation across business cycles.

Can the Market Multiply and Divide? Non-Proportional Thinking in Financial Markets
(with Kelly Shue), Revise and Resubmit, Journal of Finance
AQR Insight Award (1st Prize)

We hypothesize that investors partially think about stock price changes in dollar rather than percentage units, leading to more extreme return responses to news for lower-priced stocks. Consistent with such non-proportional thinking, we find a doubling in price is associated with a 20-30% decline in volatility and beta (controlling for size and liquidity). To identify a causal effect of price, we show that volatility increases sharply following stock splits and drops following reverse splits. Lower-priced stocks also respond more strongly to firmspecific news of the same magnitude. Non-proportional thinking offers a unifying explanation for asset pricing patterns such as the size-volatility/beta relation, the leverageeffect
puzzle, and return reversals.

Does Career Risk Deter Potential Entrepreneurs?
(with Joshua Gottleib and Ting Xu), Revise and Resubmit, Review of Financial Studies

Do potential entrepreneurs remain in wage employment because of concerns that they will face worse job opportunities should their entrepreneurial ventures fail? Using a Canadian reform that extended job-protected leave to one year for women giving birth after a cutoff date, we study whether the option to return to a previous job increases entrepreneurship. A regression discontinuity design reveals that longer job-protected leave increases entrepreneurship by 1.9 percentage points. These entrepreneurs start incorporated businesses that hire employees—in industries where experimentation before entry has low costs and high benefits. The effects are concentrated among those with more human and financial capital.