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Risk Management in Venture Capital Investor-Investee Relations

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  • Gavin C Reid
  • Nicholas G Terry
  • Julia A Smith

Abstract

This paper provides an empirical analysis of risk handling arrangements adopted in the relationship between the venture capital investor and his investee. The theoretical framework adopted is principal-agent analysis, which views the investee as a risk averse agent entering into a risk sharing contract with the investor, a risk neutral (fully diversified) principal. The sample analysed is made up of twenty venture capital investors in the UK over the period 1992-93, and (where available) their corresponding investee(s). These investors accounted for about three quarters of venture capital activity in the UK over this period. The paper reports on evidence gathered by semi-structured interviews with investors and investees, on expected returns, portfolio balance, screening and risk sharing.

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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 9505.

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Date of creation: Oct 1995
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Handle: RePEc:san:crieff:9505

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Related research

Keywords: venture capital; risk management; information asymmetry; investor-investee relations;

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References

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  1. Armstrong, Peter, 1991. "Contradiction and social dynamics in the capitalist agency relationship," Accounting, Organizations and Society, Elsevier, vol. 16(1), pages 1-25.
  2. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
  3. Richard A. Lambert, 1986. "Executive Effort and Selection of Risky Projects," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 77-88, Spring.
  4. 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, vol. 38(5), pages 1543-68, December.
  5. Blanchflower, David G & Oswald, Andrew J, 1998. "What Makes an Entrepreneur?," Journal of Labor Economics, University of Chicago Press, vol. 16(1), pages 26-60, January.
  6. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, 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, vol. 31(2), pages 365-81, May.
  8. Admati, Anat R & Pfleiderer, Paul, 1994. " Robust Financial Contracting and the Role of Venture Capitalists," Journal of Finance, American Finance Association, vol. 49(2), pages 371-402, June.
  9. Falconer Mitchell & Gavin C Reid & Nicholas G Terry, 1994. "Post Investment Demand for Accounting Information by Venture Capitalists," CRIEFF Discussion Papers 9424, Centre for Research into Industry, Enterprise, Finance and the Firm.
  10. Dixon, R, 1991. "Venture capitalists and the appraisal of investments," Omega, Elsevier, vol. 19(5), pages 333-344.
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Citations

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Cited by:
  1. Christian Keuschnigg, 2002. "Start-Up Investment With Scarce Venture Capital Support," University of St. Gallen Department of Economics working paper series 2002 2002-03, Department of Economics, University of St. Gallen.
  2. Gavin C. Reid & Julia A. Smith, 2001. "How do Venture Capitalists Handle Risk in High-Technology Ventures? - some preliminary results," CRIEFF Discussion Papers 0107, Centre for Research into Industry, Enterprise, Finance and the Firm.
  3. Hanna Silvola, 2008. "Design of MACS in growth and revival stages of the organizational life-cycle," Qualitative Research in Accounting & Management, Emerald Group Publishing, vol. 5(1), pages 27-47, April.
  4. Gavin C Reid & Julia A Smith, 1999. "Accounting for Risk: developing a new research agenda for risk appraisal in high-technology ventures," CRIEFF Discussion Papers 9915, Centre for Research into Industry, Enterprise, Finance and the Firm.
  5. Kaserer, Christoph & Wagner, Niklas & Achleitner, Ann-Kristin, 2003. "Managing investment risks of institutional private equity investors: The challenge of illiquidity," CEFS Working Paper Series 2003-01, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universit√§t M√ľnchen.
  6. Vesa Kanniainen & Christian Keuschnigg, 2000. "The Optimal Portfolio of Start-Up Firms in Venture Capital Finance," CESifo Working Paper Series 381, CESifo Group Munich.
  7. Jan Smolarski & Neil Wilner & Weifang Yang, 2011. "The use of financial information by private equity funds in evaluating new investments," Review of Accounting and Finance, Emerald Group Publishing, vol. 10(1), pages 46 - 68, February.

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