The Effect of Capital Market Characteristics on the Value of Start-Up Firms

35 Pages Posted: 23 Jan 2002

See all articles by Holger M. Mueller

Holger M. Mueller

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Roman Inderst

Goethe University Frankfurt

Multiple version iconThere are 2 versions of this paper

Date Written: July 2002

Abstract

We show that the success probability, financial contract, pre-money valuation, and value created in a start-up firm depend strongly on the characteristics of the capital market in which the start-up raises finance, such as the level of capital supply and degree of capital market competition, entry costs, and capital market transparency. We characterize the levels of capital supply and capital market competition for which the created surplus falls short of the second-best benchmark, implying that public policy measures affecting the supply of venture capital (e.g., changes in the capital gains tax) can increase welfare. We also investigate the effect of capital supply on the incentives of venture capitalists to screen projects. We show that screening is more intense if the level of capital supply is low, and less intense if it is high. The model is consistent with available empirical evidence and provides many new, testable implications.

Note: Previously titled Venture Capital Contracts and Market Structure

Keywords: Venture Capital, Optimal Contracting, Market Structure

JEL Classification: C78, D41, G24, G32

Suggested Citation

Mueller, Holger M. and Inderst, Roman, The Effect of Capital Market Characteristics on the Value of Start-Up Firms (July 2002). EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: https://ssrn.com/abstract=297507 or http://dx.doi.org/10.2139/ssrn.297507

Holger M. Mueller (Contact Author)

New York University (NYU) - Department of Finance ( email )

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HOME PAGE: http://www.stern.nyu.edu/~hmueller/

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Centre for Economic Policy Research (CEPR)

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Roman Inderst

Goethe University Frankfurt ( email )

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

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