Investor abilities and financial contracting: Evidence from venture capital
(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:
https://lup.lub.lu.se/record/3629057
- author
- Bengtsson, Ola LU and Sensoy, Berk
- organization
- publishing date
- 2011
- 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
- 2016-04-01 10:07:33
- date last changed
- 2022-04-04 02:34:59
@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}},
keywords = {{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}},
url = {{http://www.sciencedirect.com/science/article/pii/S1042957311000076}},
volume = {{20}},
year = {{2011}},
}