Mitigation of Moral Hazard and Adverse Selection in Venture Capital Financing: The Influence of the Country’s Institutional Setting

Forthcoming, Journal of Small Business Management

44 Pages Posted: 2 Mar 2019 Last revised: 4 Jul 2019

See all articles by Cristiano Bellavitis

Cristiano Bellavitis

Auckland Business School, Management and International Business

Dzidziso Samuel Kamuriwo

City University London

Ulrich Hommel

EBS Business School

Date Written: February 11, 2019

Abstract

A venture capitalist (VC) needs to trade off benefits and costs when attempting to mitigate agency problems in their investor-investee relationship. We argue that signals of ventures complement the VC’s capacity to screen and conduct a due diligence during the pre-investment phase, but its attractiveness may diminish in institutional settings supporting greater transparency. Similarly, whereas a VC may opt for contractual covenants to curb potential opportunism by ventures in the post-investment phase, this may only be effective in settings supportive of shareholder rights enforcement. Using an international sample of VC contracts, our study finds broad support for these conjectures. It delineates theoretical and practical implications for how investors can best deploy their capital in different institutional settings whilst nurturing their relationships with entrepreneurs.

Suggested Citation

Bellavitis, Cristiano and Kamuriwo, Dzidziso Samuel and Hommel, Ulrich, Mitigation of Moral Hazard and Adverse Selection in Venture Capital Financing: The Influence of the Country’s Institutional Setting (February 11, 2019). Forthcoming, Journal of Small Business Management. Available at SSRN: https://ssrn.com/abstract=3332771 or http://dx.doi.org/10.2139/ssrn.3332771

Cristiano Bellavitis (Contact Author)

Auckland Business School, Management and International Business ( email )

12 grafton rd
Auckland
Auckland, Auckland 0000
New Zealand

Dzidziso Samuel Kamuriwo

City University London ( email )

Northampton Square
London, EC1V OHB
United Kingdom

Ulrich Hommel

EBS Business School ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, 65189
Germany
+49 611 7102 1241 (Phone)
+49 611 7102 10 1241 (Fax)

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