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Heterogeneous beliefs and optimal ownership in entrepreneurial financing decisions

Author

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  • Miguel Tavares-Gärtner
  • Paulo J. Pereira
  • Elísio Brandão

Abstract

Our setting comprises one entrepreneurial firm with a growth opportunity seeking for external funding from a venture capitalist, where the entrepreneur and venture capitalist have homogeneous or heterogeneous beliefs about its growth prospects. We developed a real options model to determine the optimal ownership structure that triggers the simultaneous exercise of the growth option on the entrepreneurial firm by entrepreneurs and venture capitalists. Our results show that the more optimistic any of the parties is, the lower the post-money firm ownership that party will retain. However, optimism leads parties to delay their decision to invest in the entrepreneurial firm, by demanding higher profit triggers and investing only in more valuable entrepreneurial firms. The combination of these two effects leaves perceived returns on investment unchanged and not dependent on their own optimism.

Suggested Citation

  • Miguel Tavares-Gärtner & Paulo J. Pereira & Elísio Brandão, 2018. "Heterogeneous beliefs and optimal ownership in entrepreneurial financing decisions," Quantitative Finance, Taylor & Francis Journals, vol. 18(11), pages 1947-1958, November.
    • Handle: RePEc:taf:quantf:v:18:y:2018:i:11:p:1947-1958
    DOI: 10.1080/14697688.2018.1432882
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    Cited by:

    1. Ferreira, Ricardo M. & Pereira, Paulo J., 2021. "A dynamic model for venture capitalists’ entry–exit investment decisions," European Journal of Operational Research, Elsevier, vol. 290(2), pages 779-789.
    2. Zhang, Yuhua & Mu, Congming, 2021. "Optimal ownership of entrepreneurial firms with rational inattention," Economics Letters, Elsevier, vol. 209(C).
    3. Gan, Liu & Xia, Xin & Xu, Mingyu, 2023. "Entrepreneurial investment and financing with third-party guarantees under present-biased preferences," Finance Research Letters, Elsevier, vol. 55(PA).
    4. Yanzhao Li & Ju-e Guo & Shaolong Sun & Yongwu Li, 2022. "How time-inconsistent preferences influence venture capital exit decisions? A new perspective for grandstanding," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-24, December.

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