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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)

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.

Suggested Citation

  • Hans Landstrom, 1993. "Agency Theory and Its Application to Small Firms: Evidence from the Swedish Venture Capital Market," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 2(3), pages 203-218, Summer.
    • Handle: RePEc:pep:journl:v:2:y:1993:i:3:p:203-218
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    References listed on IDEAS

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    1. Kathleen M. Eisenhardt, 1985. "Control: Organizational and Economic Approaches," Management Science, INFORMS, vol. 31(2), pages 134-149, February.
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    3. 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, vol. 1(1), pages 1-13, Spring.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    5. 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.
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    7. William G. Ouchi, 1979. "A Conceptual Framework for the Design of Organizational Control Mechanisms," Management Science, INFORMS, vol. 25(9), pages 833-848, September.
    8. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-325, June.
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    Cited by:

    1. Jacek Lewkowicz, 2015. "Economic analysis of hiring forms dedicated to managerial positions in Poland," Ekonomia i Prawo, Uniwersytet Mikolaja Kopernika, vol. 14(2), pages 221-232, June.
    2. Richard T. Harrison & Mark R. Dibben & Colin M. Mason, 1997. "The Role of Trust in the Informal Investor's Investment Decision: An Exploratory Analysis," Entrepreneurship Theory and Practice, , vol. 21(4), pages 63-81, July.

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    More about this item

    Keywords

    Capital; Venture Capital; Agency Theory; Small Firms; Small Business; Sweden;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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