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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
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    References listed on IDEAS

    as
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    Cited by:

    1. Oleg Muratov, 2023. "Entrepreneur–Investor Information Design," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1431-1467, November.
    2. 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.
    3. Roland Strausz, 2024. "Correlation‐savvy sellers," RAND Journal of Economics, RAND Corporation, vol. 55(2), pages 266-291, June.
    4. Dongsoo Shin & Sungho Yun, 2014. "Upfront versus staged financing: the role of verifiability," Quantitative Finance, Taylor & Francis Journals, vol. 14(6), pages 1069-1078, June.
    5. Thomas Hellmann & Scott Stern, 2009. "Introduction to the Special Issue on Economics and Strategy of Entrepreneurship," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(3), pages 615-621, September.
    6. Oleg Muratov, 2020. "Entrepreneur-Investor Information Design," Diskussionsschriften dp2014, Universitaet Bern, Departement Volkswirtschaft.

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    More about this item

    Keywords

    optimal advice; agency costs; informed investors; entrepreneurial financing;
    All these keywords.

    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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