Agency Risk and Firm Valuation: An Empirical Analysis of Venture Capitalists' Private Expectations

Abstract:     
This study empirically evaluates the price impact of agency risk in firm valuation. Using a unique data set comprised of internal valuation documents, we find that venture capitalists use risk discounts to cope with expected agency risks. These effects are economically large: e.g., whenever investors deem the management team inexperienced or recent performance inadequate, a firm’s equity value drops by 17-25%. This effect is robust to i) controlling for private business risk expectations, ii) controlling for financial statement data, firm and market characteristics, and iii) examining the effect of financial contracting mechanisms to reduce agency risks.

Number of Pages in PDF File: 43

Keywords: agency risk, firm valuation, venture capital

JEL Classification: G24, G34

working papers series