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Investor abilities and financial contracting: Evidence from venture capital

Bengtsson, Ola LU and Sensoy, Berk (2011) In Journal of Financial Intermediation 20(4). p.477-502
Abstract
Using a large, new database of contractual provisions governing the allocation of cash flow rights in venture capital (VC) financings, we investigate how contract design is related to VC abilities to monitor and provide value-added services to the entrepreneur. We find that more experienced VCs, who have superior abilities and more frequently join the boards of their portfolio companies, obtain weaker downside-protecting contractual cash flow rights than less experienced VCs. Several pieces of evidence suggest that this relation is unlikely to be driven by selection effects. The results suggest that VCs with better governance abilities focus less on obtaining downside protections, which entail risk-sharing costs, and more on other aspects... (More)
Using a large, new database of contractual provisions governing the allocation of cash flow rights in venture capital (VC) financings, we investigate how contract design is related to VC abilities to monitor and provide value-added services to the entrepreneur. We find that more experienced VCs, who have superior abilities and more frequently join the boards of their portfolio companies, obtain weaker downside-protecting contractual cash flow rights than less experienced VCs. Several pieces of evidence suggest that this relation is unlikely to be driven by selection effects. The results suggest that VCs with better governance abilities focus less on obtaining downside protections, which entail risk-sharing costs, and more on other aspects of the contract (such as obtaining board representation) during negotiations with entrepreneurs. The results also imply that previous estimates of the amount entrepreneurs pay for affiliation with high-quality VCs are overstated. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to specialist publication or newspaper
publication status
published
subject
keywords
Venture capital, Finance, Entrepreneurship, Contracts
categories
Popular Science
in
Journal of Financial Intermediation
volume
20
issue
4
pages
477 - 502
publisher
Elsevier
external identifiers
  • scopus:80051798878
ISSN
1096-0473
language
English
LU publication?
yes
id
6cad8768-a58a-4ffe-95bb-856e996a4bf9 (old id 3629057)
alternative location
http://www.sciencedirect.com/science/article/pii/S1042957311000076
date added to LUP
2013-04-03 09:00:42
date last changed
2017-08-27 03:12:54
@misc{6cad8768-a58a-4ffe-95bb-856e996a4bf9,
  abstract     = {Using a large, new database of contractual provisions governing the allocation of cash flow rights in venture capital (VC) financings, we investigate how contract design is related to VC abilities to monitor and provide value-added services to the entrepreneur. We find that more experienced VCs, who have superior abilities and more frequently join the boards of their portfolio companies, obtain weaker downside-protecting contractual cash flow rights than less experienced VCs. Several pieces of evidence suggest that this relation is unlikely to be driven by selection effects. The results suggest that VCs with better governance abilities focus less on obtaining downside protections, which entail risk-sharing costs, and more on other aspects of the contract (such as obtaining board representation) during negotiations with entrepreneurs. The results also imply that previous estimates of the amount entrepreneurs pay for affiliation with high-quality VCs are overstated.},
  author       = {Bengtsson, Ola and Sensoy, Berk},
  issn         = {1096-0473},
  keyword      = {Venture capital,Finance,Entrepreneurship,Contracts},
  language     = {eng},
  number       = {4},
  pages        = {477--502},
  publisher    = {Elsevier},
  series       = {Journal of Financial Intermediation},
  title        = {Investor abilities and financial contracting: Evidence from venture capital},
  volume       = {20},
  year         = {2011},
}