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May the Force be With You: Investor Power and Company Valuations

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  • Thomas Hellmann
  • Veikko Thiele

Abstract

This paper examines the effect of investor power in a model of staged equity financing. It shows how the usual effect where market power reduces valuations can be reversed in later rounds. Once they become insiders, powerful investors may use their market power to increase, not decrease valuations. Even though powerful investors initially lower valuations, companies prefer to bring them inside to leverage their power in later financing rounds. The paper also makes predictions about investor returns, and issues a warning that unrealized interim returns can be misleading predictors of final realized returns when powerful investors distort interim valuations.

Suggested Citation

  • Thomas Hellmann & Veikko Thiele, 2018. "May the Force be With You: Investor Power and Company Valuations," NBER Working Papers 25211, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25211
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    Cited by:

    1. William H. Janeway & Ramana Nanda & Matthew Rhodes-Kropf, 2021. "Venture Capital Booms and Start-Up Financing," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 111-127, November.

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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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