The Application of Principal-Agent Methods to Investor-Investee Relations in the UK Venture Capital Industry
AbstractPrincipal-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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Bibliographic InfoPaper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 9810.
Date of creation: Oct 1998
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principal-agent model; entrepreneurship; mature small firms; venture capital; risk-bearing; information handling; contract optimality;
Other versions of this item:
- Gavin C. Reid, 1999. "The application of principal-agent methods to investor-investee relations in the UK venture capital industry," Venture Capital, Taylor and Francis Journals, vol. 1(4), pages 285-302, October.
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- 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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