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Entrepreneurial Financing, Advice, and Agency Costs

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  • Roland Strausz

    () (Free University of Berlin, Department of Economics)

Abstract

This paper studies the interplay between advice and agency costs in entrepreneurial financing. We show that advise may exacerbate agency problems, because the agent may use it at the investor's expense and thereby hurt investors. Depending on the magnitude of the agency problem, optimal financing relationship may induce full, partial, or no advice. Because the trade--off between the positive and negative effect of entrepreneurial advice is delicate, investors need to control the information flow carefully. This explains the dual role of financing and consulting by investors in entrepreneurial financing.

Suggested Citation

  • Roland Strausz, "undated". "Entrepreneurial Financing, Advice, and Agency Costs," Papers 022, Departmental Working Papers.
  • Handle: RePEc:bef:lsbest:022
    as

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    File URL: http://userpage.fu-berlin.de/%7Elsbester/papers/entrepreneurialfinance.pdf
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    References listed on IDEAS

    as
    1. Klaus M. Schmidt, 2003. "Convertible Securities and Venture Capital Finance," Journal of Finance, American Finance Association, vol. 58(3), pages 1139-1166, June.
    2. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
    3. Steven N. Kaplan & Per Strömberg, 2004. "Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses," Journal of Finance, American Finance Association, vol. 59(5), pages 2177-2210, October.
    4. 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.
    5. 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.
    6. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-1098, July.
    7. Inderst, Roman & Mueller, Holger M, 2003. "Credit Risk Analysis and Security Design," CEPR Discussion Papers 3686, C.E.P.R. Discussion Papers.
    8. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-744, Winter.
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    Cited by:

    1. Kim, Jin-Hyuk & Wagman, Liad, 2014. "Portfolio size and information disclosure: An analysis of startup accelerators," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 520-534.

    More about this item

    Keywords

    optimal advice; agency costs; informed investors; entrepreneurial financing;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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