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Fast Growing Small Entrepreneurial Firms and their Venture Capital Backers: an Applied Principal-Agent Analysis

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  • Gavin C Reid

Abstract

First the empirical background of the UK venture capital industry is developed using a panel of major UK venture capital funds over the period 1988-92. Then a framework for applied principal-agent analysis is developed, focusing on risk management and information. Under risk management it explores attitude to risk, risk sharing and bearing, and the effects of risk bearing on effort. Under information handling, it explores information systems, information asymmetries between investor (venture capitalist) and investee (entrepreneur), and ways of attenuating them, and information variance and costs. Finally, the contract between investor and investee is seen as a device for 'trading' risk and information. The implications of this 'trading' for risk bearing, effort and efficiency are explored. The whole analysis is supported by a detailed case study which reflects current practice in the UK venture capital industry.

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Bibliographic Info

Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 9421.

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Date of creation: Oct 1994
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Handle: RePEc:san:crieff:9421

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Related research

Keywords: small firms; venture capital; principal-agent analysis; case study;

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References

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  1. Siskos, Jean & Zopounidis, Constantin, 1987. "The evaluation criteria of the venture capital investment activity: An interactive assessment," Economics Papers from University Paris Dauphine 123456789/13190, Paris Dauphine University.
  2. Admati, Anat R & Pfleiderer, Paul, 1994. " Robust Financial Contracting and the Role of Venture Capitalists," Journal of Finance, American Finance Association, American Finance Association, vol. 49(2), pages 371-402, June.
  3. Lerner, Josh, 1995. " Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, American Finance Association, vol. 50(1), pages 301-18, March.
  4. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 5(2), pages 45-66, Spring.
  5. Falconer Mitchell & Gavin C Reid & Nicholas G Terry, 1994. "Post Investment Demand for Accounting Information by Venture Capitalists," CRIEFF Discussion Papers, Centre for Research into Industry, Enterprise, Finance and the Firm 9424, Centre for Research into Industry, Enterprise, Finance and the Firm.
  6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  7. Chan, Yuk-Shee & Siegel, Daniel R & Thakor, Anjan V, 1990. "Learning, Corporate Control and Performance Requirements in Venture Capital Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 365-81, May.
  8. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(2), pages 473-521, October.
  9. Chan, Yuk-Shee, 1983. " On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information," Journal of Finance, American Finance Association, American Finance Association, vol. 38(5), pages 1543-68, December.
  10. Siskos, J. & Zopounidis, C., 1987. "The evaluation criteria of the venture capital investment activity: An interactive assessment," European Journal of Operational Research, Elsevier, Elsevier, vol. 31(3), pages 304-313, September.
  11. Gregory D. Wozniak, 1987. "Human Capital, Information, and the Early Adoption of New Technology," Journal of Human Resources, University of Wisconsin Press, vol. 22(1), pages 101-112.
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Citations

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Cited by:
  1. Gavin C. Reid & Julia A. Smith, 2002. "Investor and Investee Conduct in the Risk Appraisal of High Technology New Ventures in the UK," CRIEFF Discussion Papers, Centre for Research into Industry, Enterprise, Finance and the Firm 0205, Centre for Research into Industry, Enterprise, Finance and the Firm.
  2. Bruining, H. & Bonnet, M. & Wright, D.M., 2002. "Management Control Systems and Strategy Change in Buyouts," ERIM Report Series Research in Management, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasm ERS-2002-113-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  3. Fabio Bertoni & María Ferrer & José Martí, 2013. "The different roles played by venture capital and private equity investors on the investment activity of their portfolio firms," Small Business Economics, Springer, Springer, vol. 40(3), pages 607-633, April.
  4. Falconer Mitchell & Gavin C Reid & Nicholas G Terry, 1996. "Venture Capital Supply and Accounting Information System Development," CRIEFF Discussion Papers, Centre for Research into Industry, Enterprise, Finance and the Firm 9616, Centre for Research into Industry, Enterprise, Finance and the Firm.
  5. Fathi Fakhfakh & Felix FitzRoy, 2002. "Basic Wages and Firm Characteristics: Rent-sharing in Frensh Manufacturing," CRIEFF Discussion Papers, Centre for Research into Industry, Enterprise, Finance and the Firm 0203, Centre for Research into Industry, Enterprise, Finance and the Firm.
  6. K. Baeyens & S. Manigart, 2006. "Who gets private equity? The role of debt capacity, growth and intangible assets," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 06/368, Ghent University, Faculty of Economics and Business Administration.
  7. José Martí Pellón & Marina Balboa, 2003. "Characterisation Of The Reputation Of Private Equity Managers: Evidence In Spain," Working Papers. Serie EC, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2003-16, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  8. Gavin C. Reid & Julia A. Smith, 2003. "Venture Capital and Risk in High-Technology Enterprises," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 2(3), pages 227-244, December.
  9. Yao-Wen Hsu, 2010. "Staging of venture capital investment: a real options analysis," Small Business Economics, Springer, Springer, vol. 35(3), pages 265-281, October.
  10. Hans Bruining & Ernst Verwaal & Mike Wright, 2013. "Private equity and entrepreneurial management in management buy-outs," Small Business Economics, Springer, Springer, vol. 40(3), pages 591-605, April.
  11. Gavin C. Reid & Julia A. Smith, 2001. "How do Venture Capitalists Handle Risk in High-Technology Ventures? - some preliminary results," CRIEFF Discussion Papers, Centre for Research into Industry, Enterprise, Finance and the Firm 0107, Centre for Research into Industry, Enterprise, Finance and the Firm.
  12. Gavin C. Reid, 2002. "Investor Conduct Towards New High Technology Firms: UK Evidence on How Risk is Managed," CRIEFF Discussion Papers, Centre for Research into Industry, Enterprise, Finance and the Firm 0206, Centre for Research into Industry, Enterprise, Finance and the Firm.

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