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Financing and Advising: Optimal Financial Contracts with Venture Capitalists

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Author Info
Catherine Casamatta
Abstract

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. Copyright (c) 2003 by the American Finance Association.

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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 58 (2003)
Issue (Month): 5 (October)
Pages: 2059-2086
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Handle: RePEc:bla:jfinan:v:58:y:2003:i:5:p:2059-2086

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  1. Ouidad Yousfi, 2009. "Leveraged Buy Out: Dynamic agency model with write-off option," EconomiX Working Papers 2009-13, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
  2. Cumming, D. & Johan, S., 2005. "Advice and monitoring in venture finance," Discussion Paper 03, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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  3. Tykvová, Tereza, 2003. "Is the Behavior of German Venture Capitalists Different? : Evidence from the Neuer Markt," ZEW Discussion Papers 03-44, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  4. Keuschnigg, Christian & Nielsen, Soren Bo, 2003. "Taxation and Venture Capital-Backed Entrepreneurship," CEPR Discussion Papers 4097, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. MARCOUL, Philippe & VEYSSIERE, Luc, 2008. "A Financial Contracting Approach to the Role of Supermarkets in Farmers' Credit Access," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6366, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  6. Robert E. Hall & Susan E. Woodward, 2008. "The Burden of the Nondiversifiable Risk of Entrepreneurship," NBER Working Papers 14219, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Diana Marina Del COlle, & Paolo Finaldi Russo & Andrea Generale, 2006. "The Causes and Consequences of Venture Capital Financing. An Analysis based on a Sample of Italian Firms," Temi di discussione (Economic working papers) 584, Bank of Italy, Economic Research Department. [Downloadable!]
  8. Christian Keuschnigg, 2003. "Public Policy and Venture Capital Backed Innovation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  9. Christian Keuschnigg & Soren Bo Nielsen, 2003. "Public Taxation and Venture Capital Backed Entrepreneurship," University of St. Gallen Department of Economics working paper series 2003 2003-17, Department of Economics, University of St. Gallen. [Downloadable!]
  10. Bottazzi, L. & Da Rin, M. & Hellmann, T., 2008. "What is the Role of Legal Systems in Financial Intermediation? Theory and Evidence," Discussion Paper 2008-014, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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  11. L. Bottazzi & M. Da Rin & T. Hellmann, 2007. "Who are the active investors? Evidence from Venture Capital," Working Papers 611, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
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  12. Tereza Tykvová, 2003. "The Role of the Value Added by the Venture Capitalists in Timing and Extent of IPOs," CFS Working Paper Series 2003/25, Center for Financial Studies. [Downloadable!]
  13. Cumming, Douglas & Johan, Sofia, 2006. "Corporate social responsibility: domestic and international private equity institutional investment," Discussion Paper 2, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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