Entrepreneurs, Investors, and Equity Financing

48 Pages Posted: 19 Feb 2009

See all articles by W. David Allen

W. David Allen

University of Alabama in Huntsville

Thomas W. Hall

Christopher Newport University

Date Written: February 17, 2009

Abstract

We develop a theoretical model of the interaction between investors and entrepreneurs in a stylized private-equity market. Analysis of the entrepreneur's and the investor's optimization problems leads to the derivation of the equilibrium ownership share accruing to the investor; comparative-static analysis of variation in this share then motivates four central hypotheses. We test these using unique data from a professionally-conducted survey of high-technology managers of start-up firms. Empirical analysis confirms the model's prediction of an inverse relationship between the ownership share yielded to the investor and the level of entrepreneurial profitability, productivity, and resources. Results also confirm a predicted positive association between ownership share and investor costs.

Keywords: Private equity, ownership, corporate governance

JEL Classification: G24

Suggested Citation

Allen, W. David and Hall, Thomas William, Entrepreneurs, Investors, and Equity Financing (February 17, 2009). Available at SSRN: https://ssrn.com/abstract=1345327 or http://dx.doi.org/10.2139/ssrn.1345327

W. David Allen

University of Alabama in Huntsville ( email )

Huntsville, AL 35899
United States

Thomas William Hall (Contact Author)

Christopher Newport University ( email )

United States

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