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Self-Selection and Advice in Venture Capital Finance

  • Christian Keuschnigg
  • Søren Bo Nielsen

In financing start-up firms, venture capitalists carefully select among alternative projects, design incentive compatible financial contracts and support portfolio companies with value enhancing managerial advice. This paper considers how venture capitalists can induce self-selection among entrepreneurial firms with different qualities by designing appropriate contracts and offering commercial support. We study the efficiency of the competitive market equilibrium with respect to the level and quality of entrepreneurship and the level of effort by entrepreneurs and venture capitalists. We also provide comparative statics results with respect to basic preference and technology parameters.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1909.

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Date of creation: 2007
Date of revision:
Handle: RePEc:ces:ceswps:_1909
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  1. Schmidt, Klaus M., 1999. "Convertible Securities and Venture Capital Finance," CEPR Discussion Papers 2317, C.E.P.R. Discussion Papers.
  2. 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.
  3. Masako Ueda, 2000. "Bank versus venture capital," Economics Working Papers 522, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Robin Boadway & Michael Keen, 2004. "Financing New Investments under Asymmetric Information: A General Approach," Working Papers 1017, Queen's University, Department of Economics.
  5. Fuest, Clemens & Tillessen, Philipp, 2005. "Why do governments use closed ended subsidies to support entrepreneurial investment?," Economics Letters, Elsevier, vol. 89(1), pages 24-30, October.
  6. Rafael Repullo & Javier Suarez, 2004. "Venture Capital Finance: A Security Design Approach," Review of Finance, Springer, vol. 8(1), pages 75-108.
  7. Steven N. Kaplan & Per Stromberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 281-315, 04.
  8. Marco Da Rin & Giovanna Nicodano & Alessandro Sembenelli, 2004. "Public Policy and the Creation of Active Venture Capital Markets," Working Papers 270, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  9. Christian Keuschnigg & Søren Bo Nielsen, 2004. "Taxation and Venture Capital Backed Entrepreneurship," International Tax and Public Finance, Springer, vol. 11(4), pages 369-390, 08.
  10. Inderst, Roman & Muller, Holger M., 2004. "The effect of capital market characteristics on the value of start-up firms," Journal of Financial Economics, Elsevier, vol. 72(2), pages 319-356, May.
  11. Steven N. Kaplan & Per Stromberg, 2001. "Venture Capitalists As Principals: Contracting, Screening, and Monitoring," NBER Working Papers 8202, National Bureau of Economic Research, Inc.
  12. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Kanniainen, Vesa & Keuschnigg, Christian, 2003. "The optimal portfolio of start-up firms in venture capital finance," Journal of Corporate Finance, Elsevier, vol. 9(5), pages 521-534, November.
  14. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
  15. Christian Keuschnigg & Søren Bo Nielsen, 2003. "Taxes and Venture Capital Support," CESifo Working Paper Series 1094, CESifo Group Munich.
  16. Robert E. Hall, 2005. "The Amplification of Unemployment Fluctuations through Self-Selection," NBER Working Papers 11186, National Bureau of Economic Research, Inc.
  17. Masako Ueda, 2004. "Banks versus Venture Capital: Project Evaluation, Screening, and Expropriation," Journal of Finance, American Finance Association, vol. 59(2), pages 601-621, 04.
  18. Hellmann, Thomas & Puri, Manju, 2000. "The Interaction between Product Market and Financing Strategy: The Role of Venture Capital," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 959-84.
  19. David de Meza, 2002. "Overlending?," Economic Journal, Royal Economic Society, vol. 112(477), pages F17-F31, February.
  20. 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.
  21. Innes, Robert, 1991. "Investment and government intervention in credit markets when there is asymmetric information," Journal of Public Economics, Elsevier, vol. 46(3), pages 347-381, December.
  22. 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.
  23. Cumming, Douglas J., 2005. "Capital structure in venture finance," Journal of Corporate Finance, Elsevier, vol. 11(3), pages 550-585, June.
  24. Steven N. Kaplan & Per Str�mberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 281-315.
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