How Novelty Aversion Affects Financing Options

33 Pages Posted: 23 Jan 2013  

Amar V. Bhide

Tufts University - The Fletcher School of Law and Diplomacy

Abstract

Entrepreneurs may undertake bad projects because they unwittingly rely on defective or incomplete information to estimate the returns. Investors' concerns about such misjudgements are relatively low when the entrepreneurs' knowledge about their projects has been well calibrated. But if the novelty of the project (or some other unusual circumstance) makes calibration impossible, investors may reject the entrepreneur's funding request. This `novelty aversion' effect helps explain why ventures that are initially self-financed can subsequently attract outside financing without any decrease in standard 'incentive' or moral hazard problems. It also provides new insights about the differences in the investment preference and procedures of individual 'angel' investors, venture capital partnerships and large public companies.

Comments on this paper can be found at:
http://ssrn.com/abstract=2205773

Keywords: error control, governance, joint action, organizational structure, innovation

Suggested Citation

Bhide, Amar V., How Novelty Aversion Affects Financing Options. Capitalism and Society, Vol. 1, Issue 1, Article 1, 2006. Available at SSRN: https://ssrn.com/abstract=2205772

Amar V. Bhide (Contact Author)

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Cabot 505
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Medford, MA 02155
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617-229-5050 (Phone)

HOME PAGE: http://www.bhide.net

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