Two-Sided Asymmetric Information and Convertible Securities in Venture Financing

16 Pages Posted: 20 Nov 2018

See all articles by Shih-Chung Chang

Shih-Chung Chang

Takming University of Science and Technology

Shiliang Feng

University of International Business and Economics (UIBE)

Frank Yong Wang

University of International Business and Economics

Date Written: October 17, 2018

Abstract

This paper presents a new explanation for the prevalence of convertible bond in venture capital finance. By modeling two-sided asymmetric information between entrepreneurs and venture capitalists, we prove that convertible bond can implement the optimal contract. The optimal conversion ratio increases when it's more difficult to attract a venture capitalist, and it also increases with the extent of adverse selection in the venture capitalist market. Our model also predicts that the optimal conversion ratio is negatively correlated with the competition in VC market and the level of VC's human capital.

Keywords: Start-Up Financing, Information Asymmetry, Convertible Security, Venture Capital

JEL Classification: D82, G24, G32

Suggested Citation

Chang, Shih-Chung and Feng, Shiliang and Wang, Yong, Two-Sided Asymmetric Information and Convertible Securities in Venture Financing (October 17, 2018). Available at SSRN: https://ssrn.com/abstract=3267893 or http://dx.doi.org/10.2139/ssrn.3267893

Shih-Chung Chang

Takming University of Science and Technology ( email )

56, Sec 1, Huan Shan Rd.
Nei Hu Dist.
Taipei City
Taiwan

Shiliang Feng

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Yong Wang (Contact Author)

University of International Business and Economics ( email )

10 East Huixin Street
Chaoyang District
Beijing, 100029
China

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