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Financing and Advising: Optimal Financial Contracts with Venture Capitalists

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  • Catherine Casamatta

Abstract

This paper analyses the joint provision of effort by an entrepreneur and by an advisor to improve the productivity of an investment project. Without moral hazard, it is optimal that both exert effort. With moral hazard, if the entrepreneur's effort is more efficient (less costly) than the advisor's effort, the latter is not hired if she does not provide funds. Outside financing arises endogenously. This explains why investors like venture capitalists are value enhancing. The level of outside financing determines whether common stocks or convertible bonds should be issued in response to incentives.

Suggested Citation

  • Catherine Casamatta, 2003. "Financing and Advising: Optimal Financial Contracts with Venture Capitalists," Journal of Finance, American Finance Association, vol. 58(5), pages 2059-2085, October.
  • Handle: RePEc:bla:jfinan:v:58:y:2003:i:5:p:2059-2085
    DOI: 10.1111/1540-6261.00597
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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