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Evolution of Decision and Control Rights in Venture Capital Contracts: An Empirical Analysis

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Author Info
Bienz, Carsten () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
Walz, Uwe () (Fachbereich Wirtschaftswissenschaften, Lehrstuhl für Volkswirtschaftslehre, insb. Industrieökonomie, Johann Wolfgang Goethe-Universität)

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Abstract

We analyze the structure and evolution of the allocation of decision and control rights in venture capital contracts by using a sample of 464 contracts between venture capitalists (VC) and portfolio firms from Germany. We focus on the evolution of control and decisions rights along three time dimensions: the point in time when the contract was signed, the expected duration of the contract and the actual duration of the relationship. We show that contracts are not static but that control rights are adjusted along all three time dimensions. First, we observe a change in the structure but not in the level of the VC’s control rights during the relationship between the VC and the portfolio firm. While venture capitalists return superfluous operational rights to entrepreneurs, they gain (valuable) exit rights during the course of the relationship. Second, we show that the shorter the expected length of the VC’s engagement the more control rights are allocated to the hands of the VC. Finally, we observe that learning took place in the German VC market.

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Publisher Info
Paper provided by Department of Finance and Management Science, Norwegian School of Economics and Business Administration in its series Discussion Papers with number 2007/13.

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Length: 72 pages
Date of creation: 27 Mar 2007
Date of revision:
Handle: RePEc:hhs:nhhfms:2007_013

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Postal: NHH, Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
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Web page: http://www.nhh.no/for/
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Related research
Keywords: Venture capital; corporate governance; empirical contract theory; control rights; exit rights;

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Find related papers by JEL classification:
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Julia Hirsch & Uwe Walz, 2006. "Why Do Contracts Differ between VC Types? Market Segmentation versus Corporate Governance Varieties," CFS Working Paper Series 2006/12, Center for Financial Studies. [Downloadable!]
  2. Armin Schwienbacher, 2008. "Venture capital investment practices in Europe and the United States," Financial Markets and Portfolio Management, Springer, vol. 22(3), pages 195-217, September. [Downloadable!] (restricted)
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