The Effect of Capital Market Characteristics on the Value of Start-Up Firms
35 Pages Posted: 23 Jan 2002
There are 2 versions of this paper
The Effect of Capital Market Characteristics on the Value of Start-Up Firms
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Steven N. Kaplan and Per Strömberg
-
By Steven N. Kaplan and Per Strömberg
-
Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets
By Ronald J. Gilson and Bernard S. Black
-
Money Chasing Deals?: The Impact of Fund Inflows on Private Equity Valuations
By Paul A. Gompers and Josh Lerner
-
Private Equity Performance: Returns, Persistence and Capital Flows
-
Private Equity Performance: Returns, Persistence and Capital
-
The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?
-
Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence
By Thomas F. Hellmann and Manju Puri