Firm Governance as a Determinant of Capital Lock-In

Abstract:     
This paper has two main components: methodological and substantive. Methodologically, it develops a new way of measuring and coding contractual, statutory, and regulatory variables through series of Monte-Carlo simulations. Substantively, it tests whether the extent to which a firm locks in its capital is related to the level of agency costs. In a study of lock-in choices of venture capital funds, I find that the degree of capital lock-in is inversely related to several measures of expected agency costs. Better venture organizations (the ones with fewer failed and more succeeded companies) lock their capital more tightly, as do funds where managers' compensation is more heavily based on performance and funds that employ alternative governance devices.

Keywords: Venture capital, Monte-Carlo simulation, investor withdrawal, capital lock-in

JEL Classifications: G24, G32, K22

Working Paper Series