Principal-agent analysis is applied to contemporary evidence on venture capital investment. The investor (as principal) and investee (as agent) are analysed in terms of risk management, information handling and the trading of risk and information. Investors and investees were paired in 'dyads', with each party being subject to separate face-to-face interviews. The paper develops the appropriate principal-agent models for dealing with incentives for entrepreneurial effort and issues of information and monitoring. The way in which investees and investors seek contract optimality is then examined, using qualitative data. It is shown that the evidence provides striking confirmation of the applicability of the principal-agent model to the venture capital financing of mature small firms. The most crucial feature of contract optimality was perceived to be the propoer choice of capital structure. This established ownership entitlement, created incentives for effort, and apportioned risk eficiently. Many investor-investee relations were perceived to be at or close to contract optimality. These optima were specific to time and place situations and strongly reflected individual house-styles of investors. Investor reputations were strongly attached to house styles.
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Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number
9810.
Find related papers by JEL classification: D8 - Microeconomics - - Information, Knowledge, and Uncertainty D21 - Microeconomics - - Production and Organizations - - - Firm Behavior G1 - Financial Economics - - General Financial Markets G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior M1 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration M2 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics M4 - Business Administration and Business Economics; Marketing; Accounting - - Accounting
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