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Venture Capital and the Use of Convertible Securities and Control Rights Covenants: A Fuzzy Set Approach

Author

Listed:
  • Maria Rosario Correia

    (Faculty of Management Technology, The German University in Cairo)

  • Raquel F Ch Meneses

    (Faculdade de Economia da Universidade do Porto, Universidade do Porto)

Abstract

Although venture capital is considered crucial for promoting economic de-velopment and innovation, not much has been done regarding the use of complex financing contracts in venture capital backed investments. In this study we investigate the use of convertible securities and control rights covenants for a sample of 15 Portuguese venture capital firms. We use an innovative methodology - a fuzzy set Qualitative Comparative Analysis - that considers both quantitative and qualitative factors for obtaining a solution that best fits the empirical data. Our results show that the use of convertible securities is affected by the anticipated severity of double-sided moral hazard problems. Moreover, a mixed support is provided to the agency predictions regarding the use of control right covenants. In-terestingly, the results reveal that convertible securities, unlike control rights covenants, are the most apt instrument to reduce costly double-sided incentive problems of a venture capital relationship.

Suggested Citation

  • Maria Rosario Correia & Raquel F Ch Meneses, 2017. "Venture Capital and the Use of Convertible Securities and Control Rights Covenants: A Fuzzy Set Approach," Working Papers 44, The German University in Cairo, Faculty of Management Technology.
    • Handle: RePEc:guc:wpaper:44
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    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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