Venture Capitalists Investment Incentives Under Public Equity Schemes

Abstract

This paper analyses the impact of public equity schemes on venture capitalist's incentives to finance start-up enterprises and to support the management teams. In a double-sided moral hazard model, it is shown that experienced venture capitalists, who have already financed start-up enterprises, reduce their intensity of management support under public equity schemes. However, public equity offers inexperienced venture capitalists, who have not yet financed start-up enterprises because of insufficient experience, incentives to enter the venture capital market so that they can start to accumulate experience.

Keywords: Double-sided moral hazard, public equity,venture capital

JEL Classification: D82, G24, G28, L14