Abstract

http://ssrn.com/abstract=1787323
 
 

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Does Security Choice Matter in Venture Capital? The Case of Venture Debt


Indraneel Chakraborty


Southern Methodist University (SMU), Cox School of Business

Michael Ewens


California Institute of Technology - Division of the Humanities and Social Sciences

July 6, 2012


Abstract:     
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, D92

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Date posted: March 21, 2011 ; Last revised: June 5, 2013

Suggested Citation

Chakraborty, Indraneel and Ewens, Michael, Does Security Choice Matter in Venture Capital? The Case of Venture Debt (July 6, 2012). Available at SSRN: http://ssrn.com/abstract=1787323 or http://dx.doi.org/10.2139/ssrn.1787323

Contact Information

Indraneel Chakraborty (Contact Author)
Southern Methodist University (SMU), Cox School of Business ( email )
6212 Bishop Blvd.
PO Box 750333
Dallas, TX 75275
United States
214-768-1082 (Phone)
HOME PAGE: http://indraneel.net
Michael Ewens
California Institute of Technology - Division of the Humanities and Social Sciences ( email )
1200 East California Blvd.
Pasadena, CA 91125
United States
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