Growth Firms and Relationship Finance: A Capital Structure Perspective

Management Science, Forthcoming

36 Pages Posted: 23 Mar 2011 Last revised: 23 Feb 2018

Roman Inderst

Goethe University Frankfurt

Vladimir N. Vladimirov

University of Amsterdam Business School

Date Written: February 10, 2018

Abstract

We analyze how relationship finance, such as venture capital and relationship lending, affects growth firms' capital structure choices. We show that relationship investors that obtain a strong bargaining position due to their privileged information about the firm, optimally cash in on their dominance by pushing it to finance follow-up investments with equity. The firm underinvests if its owner refuses to accept the associated dilution. However, this problem is mitigated if the firm's initial relationship financing involves high leverage or offers initial investors preferential treatment in liquidation. By contrast, if initial investors are unlikely to gain a dominant position, firms optimally lever up only in later rounds. Our implications for relationship and venture capital financing highlight that the degree of investor dominance is of key importance for growth firms' capital structure decisions.

Keywords: relationship financing, security design, capital structure, venture capital

JEL Classification: G32

Suggested Citation

Inderst, Roman and Vladimirov, Vladimir N., Growth Firms and Relationship Finance: A Capital Structure Perspective (February 10, 2018). Management Science, Forthcoming . Available at SSRN: https://ssrn.com/abstract=1787485 or http://dx.doi.org/10.2139/ssrn.1787485

Roman Inderst

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60629
Germany
+49 (69) 798-34601 (Phone)
+49 (69) 798-35000 (Fax)

HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

Vladimir N. Vladimirov (Contact Author)

University of Amsterdam Business School ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
196
rank
143,880
Abstract Views
1,152
PlumX