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Financial Contracting Between Managers And Venture Capitalists: The Role Of Value-Added Services, Reputation Seeking, And Bargaining Power

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  • Richard Fairchild
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    Abstract

    I analyze manager and venture capitalist bargaining over the financial contract in the face of double-sided moral hazard problems. The allocation of cash flows depends on the combined effects of value-added services, reputation seeking, and bargaining power. Welfare is maximized when the venture capitalist has high value-adding capabilities, the market for reputation is informationally efficient, and the manager has bargaining power. Furthermore, I consider the effect of exit strategies on the financial agreement. I also consider bidding between venture capitalists of differing abilities. Generally, the superior venture capitalist wins with a lower bid, but in some cases the inferior venture capitalist can win. 2004 The Southern Finance Association and the Southwestern Finance Association.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 27 (2004)
    Issue (Month): 4 ()
    Pages: 481-495

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    Handle: RePEc:bla:jfnres:v:27:y:2004:i:4:p:481-495

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    Web page: http://www.southwesternfinance.org/
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    Cited by:
    1. Julia Hirsch & Uwe Walz, 2013. "Why do contracts differ between venture capital types?," Small Business Economics, Springer, vol. 40(3), pages 511-525, April.
    2. Jan Smolarski & Neil Wilner & Weifang Yang, 2011. "The use of financial information by private equity funds in evaluating new investments," Review of Accounting and Finance, Emerald Group Publishing, vol. 10(1), pages 46 - 68, February.

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