In Search of a Unicorn (Feng et al., 2024)

Welcome to Revise and Resubmit, the podcast where we unpack the most exciting research shaping the world of business, economics, and beyond. Today, we explore the delicate dance of investment decisions—how managers search, strategize, and sometimes overreach to find that elusive unicorn opportunity. Our episode features “In Search of a Unicorn: Dynamic Agency with Endogenous Investment Opportunities,” a fascinating study authored by Felix Zhiyu Feng, Robin Yifan Luo, and Beatrice Michaeli, published in the prestigious Journal of Accounting and Economics, an elite FT50 journal. This research takes us inside the minds of those navigating high-stakes environments—think SPAC sponsors, venture capitalists, hedge fund activists, and innovation officers—where information asymmetry and costly search processes shape the investment landscape. The authors develop a dynamic agency model that explains why managers sometimes pursue targets that aren’t quite “first-best” and end up overinvesting. The trick lies in balancing the manager’s incentives: How do you encourage honest reporting and diligent searching, while preventing them from taking unnecessary risks or slacking off? The answer, this study suggests, lies in carefully calibrated contracts with declining investment thresholds over time. Felix Feng, a sharp mind in the field of corporate finance, collaborates with Robin Luo and Beatrice Michaeli, experts in accounting and managerial economics, to crack this puzzle. Their research links overinvestment to SPAC deals, VC funding, mergers, and even internal innovation policies, offering both theoretical insights and testable predictions. So here’s the question that lingers: Is overinvestment a necessary evil in the search for innovation, or can companies learn to strike the perfect balance? A huge thank you to the authors and Elsevier for making this research open access. Stay with us as we dive into the world of dynamic contracts, the search for unicorns, and the art of incentivizing innovation. Reference Feng, F. Z., Luo, R. Y., & Michaeli, B. (2024). In search of a unicorn: Dynamic agency with endogenous investment opportunities. Journal of Accounting and Economics, 101738. https://doi.org/10.1016/j.jacceco.2024.101738