Financing and Advising: Optimal Financial Contracts with Venture Capitalists

This paper analyses the joint provision of effort by an entrepreneur and by an advisor to improve the productivity of an investment project. Without moral hazard, it is optimal that both exert effort. With moral hazard, if the entrepreneur's effort is more efficient (less costly) than the advisor's effort, the latter is not hired if she does not provide funds. Outside financing arises endogenously. This explains why investors like venture capitalists are value enhancing. The level of outside financing determines whether common stocks or convertible bonds should be issued in response to incentives.     

Venture Capitalists,Unquoted Equity Investment Appraisal and the Role of Accounting Information

This paper aims to add to the understanding of venture capitalists' investment decision-making behaviour by providing evidence relating to the general policies they adopt in their approaches to due diligence, valuation methods, benchmark rates of return and adjustments for risk. The evidence shows that in order to address potential adverse selection problems, venture capitalists use a wide range of accounting and non-accounting information and techniques relating to the specific factors concerning a particular investment. Unpublished accounting information and subjective information are important. Significant differences emerge in the approaches to valuation and use of accounting information for valuation purposes between types of venture capitalist, according both to their stage of investment focus and whether they were captive or independent.     

Venture Capitalists and the Oversight of Private Firms

This article examines the representation of venture capitalists on the boards of private firms in their portfolios. If venture capitalists are intensive monitors of managers, their involvement as directors should be more intense when the need for oversight is greater. I show that venture capitalists' representation on the board increases around the time of chief executive officer turnover, while the number of other outsiders remains constant. I also show that distance to the firm is an important determinant of the board membership of venture capitalists, as might be anticipated if the oversight of local firms is less costly than more distant businesses.     

风险投资家和创业家的对话

1998年,我们集中力量进行产品的开发,产品已经在中国的银行和网站得到广泛的使用.ND公司历史很短,是一个高科技企业,在企业所得税方面可以享受减免.     

Post Investment Demand for Accounting Information by Venture Capitalists

The key concepts of principal-agent analysis are utilised to investigate influences on venture capitalists' accounting information requirements as used in their dealings with investees. The findings are based on structured interviews held with 20 leading venture capitalists, managing funds which together comprise over three quarters of all UK venture capital funds. The results confirm that a number of the key concepts of principal-agent analysis are mirrored in the financial communication process between venture capital investors and their investees. They reveal the venture capitalists' appreciation of the dangers of moral hazard and information asymmetry. It is shown that, as a consequence, their information demands are designed to provide safeguards through bonding arrangements. These establish and define an information flow which can be utilised as the basis for frequent and regular monitoring of the investee.     

Optimal Entrepreneurial Financial Contracting

This paper studies the optimal financing (capital structure) of entrepreneurial activity in the context of risk-aversion by incorporating the deadweight costs of bankruptcy and taxes. Unlike the extreme debt ratio (corner solution) predicted by scholars using linear models, this paper provides unique interior results for risk-free as well as risky debt, irrespective of corporate taxes. The paper also shows the necessary and sufficient conditions for both forms of debt, and the pareto-optimality of one over the other. The important findings of this paper are: (i) the existence of an equilibrium, where the borrowing interest rate is greater than the lending rate, despite the violation of Fisher separation theorem (1930); (ii) wealth plays a critical role in determining the debt ratio and the equilibrium risk-free rate of interest, complementing the De Meza and Webb (1987 and 1999) studies; (iii) an explanation for the preferred stock and income bond puzzles, extending Fooladi et al. (1991) and McConnell and Schlarbaum (1991).     

Optimal Long-Term Financial Contracting

We develop an agency model of financial contracting. We derivelong-term debt, a line of credit, and equity as optimal securities,capturing the debt coupon and maturity; the interest rate andlimits on the credit line; inside versus outside equity; dividendpolicy; and capital structure dynamics. The optimal debt-equityratio is history dependent, but debt and credit line terms areindependent of the amount financed and, in some cases, the severityof the agency problem. In our model, the agent can divert cashflows; we also consider settings in which the agent undertakeshidden effort, or can control cash flow risk.     

Venture Capitalists, Business Angels, and Performance of Entrepreneurial IPOs in the UK and France

Abstract:  Using a unique sample of 444 entrepreneurial IPOs in the UK and France, this paper analyses the investment patterns and the stock-market performance effects of two types of early stage investors: venture capitalists (VCs) and business angels (BAs). Extending existing research, we identify important endogeneity and institutional effects. Our findings indicate that UK IPOs have a higher retained ownership and lower participation ratio by BAs, but a lower retained ownership and participation ratio by VCs than in France. BA and VC investments are substitutes, and they are endogenously determined by a number of firm- and founder-related factors, such as founder ownership and external board 'interlocks', and underwriter reputation. UK VCs are effective third-party certifying agents who reduce underpricing in UK IPOs, whereas in French IPOs they increase it by appearing to engage in grandstanding. This certification effect is more significant in UK IPOs involving both high VC and BA ownership. Finally, underpricing increases with VC participation ratio, where the higher exit of VCs seems to increase the risk premium required by outside investors, in particular in the UK.     

Financial Contracting with Optimistic Entrepreneurs

Optimistic beliefs are a source of nonpecuniary benefits forentrepreneurs that can explain the "Private Equity Puzzle."This paper looks at the effects of entrepreneurial optimismon financial contracting. When the contract space is restrictedto debt, we show the existence of a separating equilibrium inwhich optimists self-select into short-term debt and realistsinto long-term debt. Long-term debt is optimal for a realistentrepreneur as it smooths payoffs across states of nature.Short-term debt is optimal for optimists for two reasons: (i)"bridging the gap in beliefs" by letting the entrepreneur takea bet on his project’s success, and (ii) letting the investorimpose adaptation decisions in bad states. We test our theory on a large data set of French entrepreneurs.First, in agreement with the psychology literature, we findthat biases in beliefs may be (partly) explained by individualcharacteristics and tend to persist over time. Second, as predictedby our model, we find that short-term debt is robustly correlatedwith "optimistic" expectation errors, even controlling for firmrisk and other potential determinants of short-term leverage.     

Anticompetitive Financial Contracting: The Design of Financial Claims

This paper presents the first model where entry deterrence takes place through financial rather than product‐market channels. In existing models, a firm's choice of financial instruments deters entry by affecting product market behavior; here entry deterrence occurs by affecting the credit market behavior of investors towards entrant firms. We find that to deter entry, the claims held on incumbent firms should be sufficiently risky, that is, equity. This contrasts with the standard Brander and Lewis (1986) result that debt deters entry. This effect is more marked the less competitive the credit market is—so more credit market competition spurs more product market competition.     

How Fundamental are Fundamental Values? Valuation Methods and their Impact on the Performance of German Venture Capitalists

This paper studies how the use of alternative valuation methodologies affects investment performance for a sample of 53 German venture capitalists. We measure investment performance by the amount of investments they need to write off and by the number of companies they take public. We find that a significant number of investment managers use discounted cash flow (DCF) techniques, but only a minority appears to use a discount rate related to the cost of capital. The majority applies DCF using subjective discount rates. We present evidence that the use of DCF is correlated with superior investment performance only if applied in conjunction with an objectifiable discount rate. Also, funds that invest with a longer horizon perform better. The use of multiples is not significantly correlated with investment performance. We conclude that a focus on fundamental values confers an advantage.     

Financial Contracting and Leverage Induced Over- and Under-Investment Incentives

This paper investigates the effects of seniority rules and restrictive dividend convenants on the over- and under-investment incentives associated with risky debt. We show that increasing seniority of new debt decreases the incidence of under-investment but increases over-investment, and vice versa. Under symmetric information, the optimal seniority rule is to give new debtholders first claim on a new project without recourse to existing assets (i.e., project financing). Under asymmetric information, the optimal debt contract requires equating the expected return to new debtholders in the default state to the new project's cash flow in the same rate. If this is not possible, the optimal seniority rule calls for strict subordination of new debt if the expected cash flow in default is small and full seniority if it is large. With regard to dividend convenants, we show that their effect depends on whether or not dividend payments are conditioned on future investments. When they are unconditioned, allowing more dividends increases the under-investment incentive. In contrast, conditional dividends decrease the underinvestment incentive and increase the over-investment incentive.     

施工企业财务风险的成因及控制

当前建筑市场竞争日趋激烈,施工企业面临日益增大的财务风险.树立财务风险观念,建立和完善风险防范机制,适度负债经营,加强成本管理,是控制施工企业财务风险、提高企业经济效益的有效措施.     

风险资金市场来

美国以IT为代表的高科技行业经历了大喜大悲.从艰难的起步到辉煌的成功,再到泡沫后的缩水,当然,以后还会再造辉煌.在这个过程中,投资者分享了高收益的喜悦,也承受了高风险的苦难.谁是投资者?或者换一种说法,高科技行业投资的风险资金应该由何而来?     

On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information

This paper develops a theory of financial intermediation that highlights the contribution of intermediaries as informed agents in a market with imperfect information. We consider a venture capital market where the entrepreneurs select the qualities of projects and their perquisite consumptions, about which the investors are imperfectly informed. It is shown that when all investors have positive search costs, the entrepreneurs are induced to offer the unacceptable inferior projects (“lemons” only), and the investors will not enter the venture capital market, but put their funds in other low return investments–an undesirable allocation of resources. Beginning with an initial undesirable situation, the financial intermediaries may evolve as informed agents that induce a Pareto-preferred allocation, leading the investors to a higher welfare state. We focus our analysis on the existence of intermediation equilibra when the market for intermediation services is competitive. The distribution of returns on projects, the fees charged by intermediaries, and the fraction of institutional holdings are all endogenous in equilibrium. It is shown that (i) there cannot be a competitive intermediation equilibrium with very high institutional holdings, and (ii) in other cases multiple equilibra may exist, but the one with the highest institutional holdings dominates the others in a Pareto sense.     

Financial Contracting and the Choice between Private Placement and Publicly Offered Bonds

The financial contracting in private placement bonds and publicly offered bonds are different. Our data show that private placement bonds are more likely to have restrictive covenants than public bonds. Private placement bonds are also more likely to be issued by smaller and riskier firms. For investment‐grade firms that issue bonds in both markets, our analysis shows that firms select the bond type to minimize financing costs. We find significant differences in the pricing of private placement and publicly offered bonds, and some of these differences appear to be related to the different institutional features between the two markets.     

Determinants of Vertical Integration: Financial Development and Contracting Costs

We study the determinants of vertical integration in a new data set of over 750,000 firms from 93 countries. We present a number of theoretical predictions on the interactions between financial development, contracting costs, and the extent of vertical integration. Consistent with these predictions, contracting costs and financial development by themselves appear to have no effect on vertical integration. However, we find greater vertical integration in countries that have both greater contracting costs and greater financial development. We also show that countries with greater contracting costs are more vertically integrated in more capital-intensive industries.     

Financial Contracting and Organizational Form: Evidence from the Regulation of Trade Credit

We present evidence that restrictions to the set of feasible financial contracts affect buyer‐supplier relationships and the organizational form of the firm. We exploit a regulation that restricted the maturity of the trade credit contracts that a large retailer could sign with some of its small suppliers. Using a within‐product difference‐in‐differences identification strategy, we find that the restriction reduces the likelihood of trade by 11%. The retailer also responds by internalizing procurement to its own subsidiaries and reducing overall purchases. Finally, we find that relational contracts can mitigate the inability to extend long trade credit terms.