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Strategic versus Financial Investors: The Role of Strategic Objectives in Financial Contracting

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  • Stefan Arping

    (University of Amsterdam)

  • Sonia Falconieri

    (Brunel University)

Abstract

Strategic investors, such as corporate venture capitalists, engage in the financing of start-up firms to complement their core businesses and to facilitate the internalization of externalities. We argue that while strategic objectives make it more worthwhile for an investor to elicit high entrepreneurial effort, they can also undermine his commitment to penalize poorly performing entrepreneurs by terminating their projects. Based on this tradeoff we develop a theory of financing choice between strategic and financial investors. Our framework provides insights into the design of corporate venturing deals and the choice between corporate venturing and independent venture capital finance.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-036/2.

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Handle: RePEc:dgr:uvatin:20090036

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Keywords: Corporate Venturing; Soft Budget Constraint;

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  1. Riyanto, Yohanes E. & Schwienbacher, Armin, 2006. "The strategic use of corporate venture financing for securing demand," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2809-2833, October.
  2. Repullo, R. & Suarez, J., 1996. "Monitoring, Liquidation, and Security Design," Papers 273, Banca Italia - Servizio di Studi.
  3. Jean-Etienne de Bettignies & Gilles Chemla, 2008. "Corporate Venturing, Allocation of Talent, and Competition for Star Managers," Management Science, INFORMS, vol. 54(3), pages 505-521, March.
  4. Hellmann, Thomas, 2002. "A theory of strategic venture investing," Journal of Financial Economics, Elsevier, vol. 64(2), pages 285-314, May.
  5. Paul A. Gompers & Josh Lerner, 1998. "The Determinants of Corporate Venture Capital Successes: Organizational Structure, Incentives, and Complementarities," NBER Working Papers 6725, National Bureau of Economic Research, Inc.
  6. Dewatripont, Mathias & Tirole, Jean, 1994. "A Theory of Debt and Equity: Diversity of Securities and Manager-Shareholder Congruence," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1027-54, November.
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