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Agency Theory and Its Application to Small Firms: Evidence from the Swedish Venture Capital Market

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  • Hans Landstrom

    (Halmstad University)

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    Abstract

    The research in small firms financing is characterized by a lack of a theoretical framework. One basic assumption in this study is that agency theory can provide an essential framework to explain the interaction between informal and formal venture capitalists and their portfolio firms. Five hypotheses generated from agency theory are formulated and tested on 62 firms backed by informal venture capitalists and 145 firms backed by formal venture capitalists. The theoretical conclusion is that agency theory does not provide a satisfactory framework to explain either the informal venture capitalist’s, nor the formal venture capitalist’s relationship to their portfolio firms. Therefore, more exploratory research must be done to develop a theory of finance which will be applicable in the small firms situation.

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    File URL: http://jefsite.org/RePEc/pep/journl/jef-1993-02-3-b-landstrom.pdf
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    Bibliographic Info

    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Small Business Finance.

    Volume (Year): 2 (1993)
    Issue (Month): 3 (Summer)
    Pages: 203-218

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    Handle: RePEc:pep:journl:v:2:y:1993:i:3:p:203-218

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    Web page: http://bschool.pepperdine.edu/jef
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    Related research

    Keywords: Capital; Venture Capital; Agency Theory; Small Firms; Small Business; Sweden;

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    1. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 26(2), pages 301-25, June.
    2. Kathleen M. Eisenhardt, 1985. "Control: Organizational and Economic Approaches," Management Science, INFORMS, INFORMS, vol. 31(2), pages 134-149, February.
    3. Maier, John II & Walker, David A., 1987. "The role of venture capital in financing small business," Journal of Business Venturing, Elsevier, vol. 2(3), pages 207-214.
    4. Haar, Nancy E. & Starr, Jennifer & MacMillan, Ian C., 1988. "Informal risk capital investors: Investment patterns on the East Coast of the U.S.A," Journal of Business Venturing, Elsevier, vol. 3(1), pages 11-29.
    5. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(2), pages 288-307, April.
    6. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, Elsevier, vol. 20(2), pages 231-259, April.
    7. William G. Ouchi, 1979. "A Conceptual Framework for the Design of Organizational Control Mechanisms," Management Science, INFORMS, INFORMS, vol. 25(9), pages 833-848, September.
    8. James S. Ang, 1991. "Small Business Uniqueness and the Theory of Financial Management," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, Pepperdine University, Graziadio School of Business and Management, vol. 1(1), pages 1-13 , Spring.
    9. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
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