Does Security Choice Matter in Venture Capital? The Case of Venture Debt
Southern Methodist University (SMU), Cox School of Business
California Institute of Technology - Division of the Humanities and Social Sciences
July 6, 2012
The switch from equity to debt in venture capital-backed entrepreneurial firms is rare, but uniquely informative. Using a novel dataset of financing decisions, we find that entrepreneurial firms that raise debt financing suffer from an average 40% post-debt valuation drop and a 26% lower probability of successful exit (IPO/acquisition). Venture capitalists with equity stakes lend to lower quality entrepreneurial firms compared to outside lenders, and debt from both precedes deterioration in firm quality. Our results do not imply that debt causes negative outcomes. Rather, we argue that debt helps maintain incentive alignment after adverse shocks to firm quality.
Number of Pages in PDF File: 55
Keywords: Venture Capital, Entrepreneurship, Debt Financing, Signaling, Information Asymmetry
JEL Classification: G24, G32, L26, D82, D86, D92working papers series
Date posted: March 21, 2011 ; Last revised: June 5, 2013
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