IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Advice and monitoring in venture finance

  • Douglas Cumming

    ()

  • Sofia Johan

    ()

This paper provides empirical insight into the role of contracts and legal systems for managing investor–investee relationships along two dimensions: providing advice and addressing conflict. We examine a new detailed dataset from European venture capital (VC) funds. We match very specific contractual terms in VC contracts with the effort (total time spent) and advice that VCs provide to their entrepreneurial investee firms. We also analyze VC–entrepreneur conflicts. We compare the importance of contractual versus non-contractual governance mechanisms, as well as the role of legal systems in different countries for facilitating VC–entrepreneur relationships. The data indicate VC cash-flow and control rights significantly facilitating effort and advice that VCs provide to entrepreneurs. VC–entrepreneur conflicts are closely tied to the quality of laws in which the entrepreneur resides: higher quality legal systems mitigate VC–entrepreneur conflicts. The data further indicate that non-contractual governance mechanisms significantly facilitate VC advice and mitigate VC–entrepreneur conflicts. The results provide a unique unifying look into the role of actual VC contracts and legal settings versus non-contractual governance mechanisms, risk, and success potential on VC–entrepreneur relationships in an international context. Copyright Swiss Society for Financial Market Research 2007

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://hdl.handle.net/10.1007/s11408-006-0041-3
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Springer & Swiss Society for Financial Market Research in its journal Financial Markets and Portfolio Management.

Volume (Year): 21 (2007)
Issue (Month): 1 (March)
Pages: 3-43

as
in new window

Handle: RePEc:kap:fmktpm:v:21:y:2007:i:1:p:3-43
DOI: 10.1007/s11408-006-0041-3
Contact details of provider: Web page: http://www.springer.com

Web page: http://www.fmpm.ch/

More information through EDIRC

Order Information: Web: http://www.springer.com/business+%26+management/journal/11408/PS2

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Douglas J. Cumming, 2006. "The Determinants of Venture Capital Portfolio Size: Empirical Evidence," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1083-1126, May.
  2. Rainer Lauterbach & Isabell Welpe & Jan Fertig, 2007. "Performance differentiation: cutting losses and maximizing profits of private equity and venture capital investments," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 21(1), pages 45-67, March.
  3. Joshua Lerner, 2002. "Boom and bust in the venture capital industry and the impact on innovation," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 25-39.
  4. Rafael Repullo & Javier Suarez, 2004. "Venture Capital Finance: A Security Design Approach," Review of Finance, European Finance Association, vol. 8(1), pages 75-108.
  5. Sapienza, Harry J., 1992. "When do venture capitalists add value?," Journal of Business Venturing, Elsevier, vol. 7(1), pages 9-27, January.
  6. Christian Keuschnigg, 2002. "Taxation of a Venture Capitalist with a Portfolio of Firms," CESifo Working Paper Series 813, CESifo Group Munich.
  7. Martin Eling, 2006. "Performance measurement of hedge funds using data envelopment analysis," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(4), pages 442-471, December.
  8. Keuschnigg, Christian & Nielsen, Soren Bo, 2002. "Start-ups, Venture Capitalists and the Capital Gains Tax," CEPR Discussion Papers 3263, C.E.P.R. Discussion Papers.
  9. Daniel Berkowitz & Karina Pistor & Jean-Francois Richard, 2001. "Economic Development, Legality, and the Transplant Effect," William Davidson Institute Working Papers Series 410, William Davidson Institute at the University of Michigan.
  10. Kanniainen, Vesa & Keuschnigg, Christian, 2004. "Start-up investment with scarce venture capital support," Journal of Banking & Finance, Elsevier, vol. 28(8), pages 1935-1959, August.
  11. Christian Keuschnigg & Soren Nielsen, 2001. "Public Policy for Venture Capital," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 557-572, August.
  12. Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc.
  13. Colin Mayer & Koen Schoors & Yishay Yafeh, 2003. "Sources of Funds and Investment Activities of Venture Capital Funds: Evidence from Germany, Israel, Japan and the UK," NBER Working Papers 9645, National Bureau of Economic Research, Inc.
  14. Sophie Manigart & Koen De Waele & Mike Wright & Ken Robbie & Philippe Desbrières & Harry Sapienza, 1999. "Venture capitalists, investment appraisal and accounting information: a comparative study of the US, UK, France, Belgium and Holland," Chapters, in: Management Buy-outs and Venture Capital, chapter 11 Edward Elgar Publishing.
  15. Kaplan, Steven N. & Strömberg, Per, 2003. "Characteristics, Contracts and Actions: Evidence from Venture Capitalist Analyses," SIFR Research Report Series 14, Institute for Financial Research.
  16. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 473-494.
  17. Christian Keuschnigg, 2004. "Venture Capital Backed Growth," Journal of Economic Growth, Springer, vol. 9(2), pages 239-261, 06.
  18. Oliver Hart & John Moore, 1998. "Foundations of incomplete contracts," LSE Research Online Documents on Economics 19354, London School of Economics and Political Science, LSE Library.
  19. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
  20. Keuschnigg, Christian, 2003. "Optimal Public Policy for Venture Capital Backed Innovation," CEPR Discussion Papers 3850, C.E.P.R. Discussion Papers.
  21. James A. Brander & Raphael Amit & Werner Antweiler, 2002. "Venture-Capital Syndication: Improved Venture Selection vs. The Value-Added Hypothesis," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(3), pages 423-452, 09.
  22. Thomas Hellmann & Manju Puri, 2002. "Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence," Journal of Finance, American Finance Association, vol. 57(1), pages 169-197, 02.
  23. Cumming, Douglas J., 2005. "Capital structure in venture finance," Journal of Corporate Finance, Elsevier, vol. 11(3), pages 550-585, June.
  24. André Gygax & Anna Griffiths, 2007. "Do venture capitalists imitate portfolio size?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 21(1), pages 69-94, March.
  25. Cestone, Giacinta, 2002. "Venture Capital Meets Contract Theory: Risky Claims or Formal Control?," CEPR Discussion Papers 3462, C.E.P.R. Discussion Papers.
  26. Joshua Lerner, 1994. "The Syndication of Venture Capital Investments," Financial Management, Financial Management Association, vol. 23(3), Fall.
  27. Manigart, S. & Bruining, J. & Lockett, A. & Meuleman, M., 2002. "Why Do European Venture Capital Companies Syndicate?," ERIM Report Series Research in Management ERS-2002-98-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.
  28. RAFAEL LaPORTA & FLORENCIO LOPEZ-de-SILANES & ANDREI SHLEIFER & ROBERT W. VISHNY, . "Legal Determinants of External Finance,"," CRSP working papers 324, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  29. Vesa Kanniainen & Christian Keuschnigg, 2000. "The Optimal Portfolio of Start-Up Firms in Venture Capital Finance," CESifo Working Paper Series 381, CESifo Group Munich.
  30. Christian Keuschnigg & Soren Bo Nielsen, 2003. "Taxes and Venture Capital Support," Review of Finance, Springer, vol. 7(3), pages 515-539.
  31. Schmidt, Klaus M., 1999. "Convertible Securities and Venture Capital Finance," CEPR Discussion Papers 2317, C.E.P.R. Discussion Papers.
  32. Mike Burkart & Denis Gromb & Fausto Panunzi, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 693-728.
  33. Dessi, Roberta, 2004. "Start-up Finance, Monitoring and Collusion," IDEI Working Papers 264, Institut d'Économie Industrielle (IDEI), Toulouse.
  34. Francesca Cornelli & Oved Yosha, 2003. "Stage Financing and the Role of Convertible Securities," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 1-32.
  35. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
  36. Samuel Kortum & Josh Lerner, 2000. "Assessing the Contribution of Venture Capital to Innovation," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 674-692, Winter.
  37. Mike Wright & Andy Lockett, 2003. "The Structure and Management of Alliances: Syndication in the Venture Capital Industry," Journal of Management Studies, Wiley Blackwell, vol. 40(8), pages 2073-2102, December.
  38. Sophie Manigart & Miguel Meuleman, 2002. "Why do European Venture Capital Companies syndicate?," Finance 0210006, EconWPA.
  39. Catherine Casamatta, 2003. "Financing and Advising: Optimal Financial Contracts with Venture Capitalists," Journal of Finance, American Finance Association, vol. 58(5), pages 2059-2086, October.
  40. Shepherd, Dean A. & Armstrong, Michael J. & Levesque, Moren, 2005. "Allocation of attention within venture capital firms," European Journal of Operational Research, Elsevier, vol. 163(2), pages 545-564, June.
  41. Keuschnigg, Christian & Nielsen, Soren Bo, 2000. "Tax Policy, Venture Capital and Entrepreneurship," CEPR Discussion Papers 2626, C.E.P.R. Discussion Papers.
  42. Philippe Desbrières & Sophie Manigart & Koen De Waele & Mike Wright & Ken Robbie & Harry Sapienza & Amy Beekman, 2002. "Determinants of required return in venture capital investments:A five country study," Working Papers CREGO 1020701, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
  43. Josh Lerner & Antoinette Schoar, 2005. "Does Legal Enforcement Affect Financial Transactions? The Contractual Channel in Private Equity," The Quarterly Journal of Economics, Oxford University Press, vol. 120(1), pages 223-246.
  44. Casamatta, Catherine & Haritchabalet, Carole, 2003. "Learning and Syndication in Venture Capital Investments," CEPR Discussion Papers 3867, C.E.P.R. Discussion Papers.
  45. Manuel Ammann & Ralf Seiz, 2005. "An IFRS 2 and FASB 123 (R) Compatible Model for the Valuation of Employee Stock Options," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 19(4), pages 381-396, December.
  46. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
  47. Lerner, Josh, 1995. " Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, vol. 50(1), pages 301-18, March.
  48. Sapienza, Harry J. & Manigart, Sophie & Vermeir, Wim, 1996. "Venture capitalist governance and value added in four countries," Journal of Business Venturing, Elsevier, vol. 11(6), pages 439-469, November.
  49. Douglas Cumming & Sofia Johan, 2006. "Is it the Law or the Lawyers? Investment Covenants around the World," European Financial Management, European Financial Management Association, vol. 12(4), pages 535-574.
  50. Sapienza, Harry J. & De Clercq, Dirk & Sandberg, William R., 2005. "Antecedents of international and domestic learning effort," Journal of Business Venturing, Elsevier, vol. 20(4), pages 437-457, July.
  51. Bergemann, Dirk & Hege, Ulrich, 1997. "Venture Capital Financing, Moral Hazard and Learning," CEPR Discussion Papers 1738, C.E.P.R. Discussion Papers.
  52. Lerner, Joshua & Schoar, Antoinette, 2003. "The Illiquidity Puzzle: Theory and Evidence from Private Equity," Working papers 4378-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  53. 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.
  54. David H. Hsu, 2004. "What Do Entrepreneurs Pay for Venture Capital Affiliation?," Journal of Finance, American Finance Association, vol. 59(4), pages 1805-1844, 08.
  55. Gorman, Michael & Sahlman, William A., 1989. "What do venture capitalists do?," Journal of Business Venturing, Elsevier, vol. 4(4), pages 231-248, July.
  56. Christian Keuschnigg, 2003. "Public Policy and Venture Capital Backed Innovation," CESifo Working Paper Series 1066, CESifo Group Munich.
  57. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  58. Cumming, D. & Johan, S.A., 2005. "Provincial preferences in private equity," Discussion Paper 2005-004, Tilburg University, Tilburg Law and Economic Center.
  59. Barry, Christopher B. & Muscarella, Chris J. & Peavy, John III & Vetsuypens, Michael R., 1990. "The role of venture capital in the creation of public companies*1: Evidence from the going-public process," Journal of Financial Economics, Elsevier, vol. 27(2), pages 447-471, October.
  60. Andrei A. Kirilenko, 2001. "Valuation and Control in Venture Finance," Journal of Finance, American Finance Association, vol. 56(2), pages 565-587, 04.
  61. Stefan Kassberger & Rüdiger Kiesel, 2006. "A fully parametric approach to return modelling and risk management of hedge funds," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(4), pages 472-491, December.
  62. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
  63. Fried, Jesse M. & Ganor, Mira, 2006. "Agency Costs of Venture Capitalist Control in Startups," Berkeley Olin Program in Law & Economics, Working Paper Series qt5rz3w67b, Berkeley Olin Program in Law & Economics.
  64. Christian Keuschnigg & Søren Bo Nielsen, 2004. "Progressive Taxation, Moral Hazard, and Entrepreneurship," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(3), pages 471-490, 08.
  65. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  66. Cécile Moigne & Patrick Savaria, 2006. "Relative importance of hedge fund characteristics," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(4), pages 419-441, December.
  67. Bill Francis & Iftekhar Hasan, 2001. "The Underpricing of Venture and Nonventure Capital IPOs: An Empirical Investigation," Journal of Financial Services Research, Springer;Western Finance Association, vol. 19(2), pages 99-113, April.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:kap:fmktpm:v:21:y:2007:i:1:p:3-43. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)

or (Rebekah McClure)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.