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Financing Entrepreneurs: Optimal Contracts and the Role of Intermediaries

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  • Roberta Dessí
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    Abstract

    I study an economy in which entrepreneurs seek financing for long-term projects from intermediaries, who specialise in monitoring, and uninformed investors. Monitoring enables an intermediary to affect investment decisions, and to learn the firms probability of success. Optimal financial contracts are designed to induce both ex ante (choice of investment project) and ex post (decision to continue or liquidate) efficiency. The results can account for some common characteristics of venture capital financing: (a) the fact that venture capitalists are given substantial control rights, (b) the use of convertible securities, (c) the fact the continuation finance is often raised through an IPO, while venture capitalists typically do not exit at this point.

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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp328.pdf
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    Bibliographic Info

    Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp328.

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    Date of creation: Jun 1999
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    Handle: RePEc:fmg:fmgdps:dp328

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    Web page: http://www.lse.ac.uk/fmg/

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    Cited by:
    1. Masako Ueda, 2000. "Bank versus venture capital," Economics Working Papers 522, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Giacinta CESTONE, 2001. "Venture Capital Meets Contract Theory: Risky Claims or Formal Control?," UFAE and IAE Working Papers 480.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).

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