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Venture capital financing, moral hazard, and learning

Listed author(s):
  • Ulrich Hege

    ()

    (Department of Finance - Tilburg University, CEPR - Center for Economic Policy Research - CEPR)

  • Dirk Bergemann

    (Department of Economics - Yale University [New Haven])

We consider the provision of venture capital in a dynamic agency model. The value of the venture project is initially uncertain and more information arrives by developing the project. The allocation of the funds and the learning process are subject to moral hazard. The optimal contract is a time-varying share contract which provides intertemporal risk-sharing between venture capitalist and entrepreneur. The share of the entrepreneur reflects the value of a real option. The option itself is based on the control of the funds. The dynamic agency costs may be high and lead to an inefficient early stopping of the project. A positive liquidation value explains the adoption of strip financing or convertible securities. Finally, relationship financing, including monitoring and the occasional replacement of the management improves the efficiency of the financial contracting.

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Paper provided by HAL in its series Post-Print with number hal-00481696.

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Date of creation: Aug 1998
Publication status: Published in Journal of Banking and Finance, Elsevier, 1998, vol.22, n°6, pp. 703-735. <10.1016/S0378-4266(98)00017-X>
Handle: RePEc:hal:journl:hal-00481696
DOI: 10.1016/S0378-4266(98)00017-X
Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00481696
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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  1. 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.
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  3. Gompers, Paul & Lerner, Josh, 1996. "The Use of Covenants: An Empirical Analysis of Venture Partnership Agreements," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 463-498, October.
  4. Chan, Yuk-Shee & Siegel, Daniel R & Thakor, Anjan V, 1990. "Learning, Corporate Control and Performance Requirements in Venture Capital Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 365-381, May.
  5. Lerner, Josh, 1995. " Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, vol. 50(1), pages 301-318, March.
  6. Gorman, Michael & Sahlman, William A., 1989. "What do venture capitalists do?," Journal of Business Venturing, Elsevier, vol. 4(4), pages 231-248, July.
  7. James M. Poterba, 1989. "Venture Capital and Capital Gains Taxation," NBER Chapters,in: Tax Policy and the Economy, Volume 3, pages 47-68 National Bureau of Economic Research, Inc.
  8. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
  9. Gompers, Paul A, 1995. " Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-1489, December.
  10. Cornelli, F. & Yosha, O., 1997. "Stage Financing and the Role of Convertible Debt," Papers 23-97, Tel Aviv.
  11. Cornelli, Francesca & Yosha, Oved, 1997. "Stage Financing and the Role of Convertible Debt," CEPR Discussion Papers 1735, C.E.P.R. Discussion Papers.
  12. Sagari, Silvia & Guidotti, Gabriela, 1991. "Venture capital operations and their potential role in LDC markets," Policy Research Working Paper Series 540, The World Bank.
  13. Lerner, Joshua, 1994. "Venture capitalists and the decision to go public," Journal of Financial Economics, Elsevier, vol. 35(3), pages 293-316, June.
  14. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
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