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Financial contracts and contingent control rights

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  • Vauhkonen, Jukka

Abstract

According to empirical studies of venture capital finance, the division of control rights between entrepreneur and venture capitalists is often contingent on certain measures of firm performance.If the indicator of the company's performance (eg earnings before taxes and interest) is low, the venture capital firm obtains full control of the company.If company performance improves, the entrepreneur retains or obtains more control rights. If company performance is very good, the venture capitalist relinquishes most of his control rights.In this article, we extend the incomplete contracting model of Aghion and Bolton to construct a theoretical model that is consistent with these empirical findings.

Suggested Citation

  • Vauhkonen, Jukka, 2003. "Financial contracts and contingent control rights," Bank of Finland Research Discussion Papers 14/2003, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2003_014
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    References listed on IDEAS

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    1. Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 1-41.
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    6. repec:ebl:ecbull:v:7:y:2002:i:1:p:1-3 is not listed on IDEAS
    7. 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.
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    12. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 473-494.
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    More about this item

    Keywords

    incomplete contracts; financial contracting; contingent contracts; control rights; joint ownership;
    All these keywords.

    JEL classification:

    • 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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