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Entrepreneurial Financing and Costly Due Diligence

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  • Chris Yung

Abstract

In the traditional solution to the adverse selection problem, entrepreneurs indirectly signal quality via security choice, typically debt. This paper models an alternative solution. The costly due diligence of venture capitalists directly reveals the quality of projects, thereby reducing information asymmetry. It is shown that this mechanism necessitates profit-sharing, a contractual feature usually associated in the literature with managerial agency costs rather than adverse selection. Copyright (c) 2009, The Eastern Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6288.2008.00213.x
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Bibliographic Info

Article provided by Eastern Finance Association in its journal Financial Review.

Volume (Year): 44 (2009)
Issue (Month): 1 (02)
Pages: 137-149

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Handle: RePEc:bla:finrev:v:44:y:2009:i:1:p:137-149

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Web page: http://www.easternfinance.org/
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Web: http://www.blackwellpublishing.com/subs.asp?ref=0732-8516

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Cited by:
  1. Cumming, Douglas & Li, Dan, 2013. "Public policy, entrepreneurship, and venture capital in the United States," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 345-367.

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