Financing and Advising with (Over)Confident Entrepreneurs: An Experimental Investigation

39 Pages Posted: 27 May 2015

See all articles by Laurent Vilanova

Laurent Vilanova

University of Lyon 2

Nadege Marchand

Groupe d' Analyse et de Theorie Economique (GATE)

Walid Hichri

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Date Written: May 22, 2015

Abstract

We test in the laboratory how entrepreneurs’ skill perceptions influence the design of financing and advising contracts. Our theoretical framework proposes that self-confident entrepreneurs prefer issuing debt whereas low self-confident ones prefer equity which induces strong investor assistance. The prevalence of overconfidence makes investors more reluctant to accept debt offers and constrains self-confident entrepreneurs to finance through mixed securities. Experimental results show that self-confident entrepreneurs issue more debt-like securities and receive less assistance. We also show that entrepreneurs learn not to offer pure debt and that initial ignorance of their own skills reinforces entrepreneurs’ ability to learn through risky choices.

Keywords: Entrepreneurs, investment decision, learning, overconfidence, venture capital

JEL Classification: C72, C92, D83

Suggested Citation

Vilanova, Laurent and Marchand, Nadege and Hichri, Walid, Financing and Advising with (Over)Confident Entrepreneurs: An Experimental Investigation (May 22, 2015). Available at SSRN: https://ssrn.com/abstract=2609297 or http://dx.doi.org/10.2139/ssrn.2609297

Laurent Vilanova (Contact Author)

University of Lyon 2 ( email )

93 Chemin des Mouilles
Ecully, 69009
France

Nadege Marchand

Groupe d' Analyse et de Theorie Economique (GATE) ( email )

CNRS UMR 5824
93, chemin des Mouilles - B.P.167
69130 Ecully cedex
France

Walid Hichri

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

93, chemin des Mouilles
Ecully, 69130
France
+33(0) 611 552 457 (Phone)
+33 (0) 472 866 090 (Fax)

HOME PAGE: http://www.gate.cnrs.fr

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