Raising Capital from Investor Syndicates with Strategic Communication
71 Pages Posted: 18 Jun 2020 Last revised: 27 Sep 2021
Date Written: Sep 27, 2021
Projects and firms are commonly financed by investor syndicates. I study how investors ac- quire and share information in syndicates and solve the entrepreneur’s financial contracting problem. The key mechanism is that investors share information through strategic communication. Contracts determine whether investors have aligned or divergent interests and further how they communicate strategically. When the project has high ex ante profitability, the optimal contracts employ hierarchical structures to differentiate investors, create conflicts of interest, and impede information sharing. When the project has low ex ante profitability, the optimal contracts employ flat structures to homogenize investors, align their interests, and facilitate information sharing. This pattern of syndicate structures and their underlying logic are consistent with empirical observations. Welfare analysis implies that attenuating strategic communication to improve information sharing between investors is not socially preferred in many cases.
Keywords: contracting with externalities, syndication, strategic communication, group decision making
JEL Classification: D71, D83, D86, G32, L24
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