Financing a Portfolio of Projects

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Financing a Portfolio of Projects

Author Info

Inderst, Roman
Mueller, Holger M
Muennich, Felix

Abstract

This paper shows that investors financing a portfolio of projects may use the depth of their financial pockets to overcome entrepreneurial incentive problems. While competition for scarce informed capital at the refinancing stage increases the investor’s ex post bargaining position, it may nevertheless improve entrepreneurs’ ex ante incentives. This is because projects funded by investors with 'shallow pockets' must have not only a positive NPV at the refinancing stage, but one that is higher than that of competing portfolio projects. We also show that, besides mitigating moral hazard, committing to shallow pockets may have benefits in dealing with adverse selection problems. Our paper may help to understand provisions used in venture capital finance that limit a fund’s initial capital and make it difficult to add on more capital once the initial venture capital fund is raised. Our paper also provides a number of empirical implications, some of which have not yet been tested.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5711.

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Date of creation: Jun 2006
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Handle: RePEc:cpr:ceprdp:5711

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Find related papers by JEL classification:
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-10-28 (All new papers)
NEP-BEC-2006-10-28 (Business Economics)
NEP-ENT-2006-10-28 (Entrepreneurship)
NEP-FIN-2006-10-28 (Finance)

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