Entrepreneurial Financing, Advice, and Agency Costs
AbstractThis paper studies the interplay between advice and agency costs in entrepreneurial financing. We show that advise may exacerbate agency problems, because the agent may use it at the investor's expense and thereby hurt investors. Depending on the magnitude of the agency problem, optimal financing relationship may induce full, partial, or no advice. Because the trade--off between the positive and negative effect of entrepreneurial advice is delicate, investors need to control the information flow carefully. This explains the dual role of financing and consulting by investors in entrepreneurial financing.
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Other versions of this item:
- Roland Strausz, 2009. "Entrepreneurial Financing, Advice, and Agency Costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(3), pages 845-870, 09.
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-11-09 (All new papers)
- NEP-CFN-2003-11-09 (Corporate Finance)
- NEP-FIN-2003-11-09 (Finance)
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