Venture Capital Contracting and Syndication: An Experiment in Computational Corporate Finance
Michigan State University - Department of Finance
Kedran Rae Garrison
Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA)
Stewart C. Myers
Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)
NBER Working Paper No. w11624
This paper develops a model to study how entrepreneurs and venture-capital investors deal with moral hazard, effort provision, asymmetric information and hold-up problems. We explore several financing scenarios, including first-best, monopolistic, syndicated and fully competitive financing. We solve numerically for the entrepreneur's effort, the terms of financing, the venture capitalist's investment decision and NPV. We find significant value losses due to holdup problems and under-provision of effort that can outweigh the benefits of staged financing and investment. We show that a commitment to later-stage syndicate financing increases effort and NPV and preserves the option value of staged investment. This commitment benefits initial venture capital investors as well as the entrepreneur.
Number of Pages in PDF File: 57working papers series
Date posted: November 20, 2005
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