Outside Insiders: Do Limited Partners Obtain Valuable Information About Stocks Backed by Their Venture Capital Funds? and Railroad Tunneling: Self Dealing During the Construction of the First Transcontinental Railroad

Timothy E Trombley, Purdue University


In Chapter 1, we investigate whether limited partners (LPs) of venture capital (VC) funds have access to information about newly listed stocks backed by their VC fund. We find that LPs obtain high returns when they invest in these stocks. These returns are not explained by LPs’ ability to pick stocks, and are higher when LPs have a higher information advantage over the public. Further, LPs’ access to information through a VC fund eliminates the familiarity bias that they display otherwise. Overall, our results are consistent with LPs having access to information. These findings contribute to the current debate on insider trading regulations. In Chapter 2, I evaluate the first Transcontinental Railroad from a corporate governance perspective. I show that the controlling shareholders of the two companies that owned the rights to construct the first Transcontinental Railroad both engaged in tunneling. They made above-market rate contracts with companies that they controlled in order to expropriate cash flows for themselves, at the expense of minority shareholders and the United States Government (which guaranteed the firms’ 2nd mortgage bonds). Further, even though both organizations were caught, the Union Pacific was more severely punished than the Central Pacific. I evaluate several possible reasons for this difference, and conclude that the most satisfying explanation is that the public was furious at the benefits the Union Pacific received from its political connections. This explanation could account for the literature’s finding that surprisingly few modern American firms have politically connections despite the well-documented benefits of political connections.




McConnell, Purdue University.

Subject Area

Finance|Economic history

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