Financing and Managerial Support with (Some) Optimistic Entrepreneurs
56 Pages Posted: 10 May 2011
Date Written: May 2011
This paper analyzes optimal financing and advising contracts between potentially optimistic entrepreneurs and potentially supportive financiers. The presence of optimistic entrepreneurs (who may overestimate their managerial abilities) leads realistic-financiers to bring managerial support even if entrepreneurs are self-confident, i.e. even if they believe they don't need 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.
JEL Classification: D86, G24, G32
Suggested Citation: Suggested Citation