Financing and Managerial Support with (Some) Optimistic Entrepreneurs
53 Pages Posted: 15 Mar 2010
Date Written: March 14, 2010
This paper analyses optimal financing contracts between potentially optimistic entrepreneurs and potentially supportive financiers. The presence of optimistic entrepreneurs (who overestimate their personal abilities to manage their venture) leads realistic financiers to bring managerial support even if entrepreneurs are self-confident, i.e. even if they believe they don't need managerial support. We find that self-confident entrepreneurs choose convertible securities with more debt-like features (less supportive financier and higher downside protection for the financier) than self-unconfident ones. The paper also shows that the prevalence of entrepreneurial optimism renders more difficult for self-confident entrepreneurs to signal themselves through the choice of financing contracts and favors the emergence of a unique form of finance. In contrast, entrepreneurs use a greater variety of securities when entrepreneurial optimism is less prevalent.
Keywords: venture capital, optimism, entrepreneurship, financing contracts
JEL Classification: G24, G32
Suggested Citation: Suggested Citation