Staged Financing in Venture Capital: Moral Hazard and Risks

29 Pages Posted: 26 May 2003

See all articles by Susheng Wang

Susheng Wang

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Flora H. Zhou

Bentley University

Multiple version iconThere are 2 versions of this paper

Date Written: July 2002

Abstract

This paper investigates staged financing in an environment where an entrepreneur faces an imperfect capital market and an investor faces moral hazard and uncertainty. Staged financing plays two roles in this model: to control risk and to mitigate moral hazard. Using parametric functions and comparing staged financing with upfront financing, we discover a few interesting properties of staged financing. In particular, we show that when used together with a sharing contract, staged financing acts as an effective complementary mechanism to contracting in controlling agency problems.

Keywords: Venture Capital, staged financing, moral hazard, risks

JEL Classification: G30

Suggested Citation

Wang, Susheng and Zhou, Flora H., Staged Financing in Venture Capital: Moral Hazard and Risks (July 2002). Available at SSRN: https://ssrn.com/abstract=385080 or http://dx.doi.org/10.2139/ssrn.385080

Susheng Wang (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Hong Kong
China

Flora H. Zhou

Bentley University ( email )

175 Forest Street
Waltham, MA 02145
United States

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