Investor abilities and financial contracting: Evidence from venture capital

Ola Bengtsson, Berk Sensoy

Research output: Contribution to specialist publication or newspaperSpecialist publication articlePopular science

38 Citations (SciVal)

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.
Original languageEnglish
Pages477-502
Volume20
No.4
Specialist publicationJournal of Financial Intermediation
PublisherElsevier
Publication statusPublished - 2011

Subject classification (UKÄ)

  • Economics

Keywords

  • Venture capital
  • Finance
  • Entrepreneurship
  • Contracts

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