The Effect of Capital Market Characteristics on the Value of Start-Up Firms

Posted: 26 Jun 2003

See all articles by Roman Inderst

Roman Inderst

Goethe University Frankfurt

Holger M. Mueller

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Abstract

We show that the pricing, contractual structure, and efficiency of venture capital deals depends on characteristics of the capital market in which the start-up raises finance. Market characteristics such as the expected return on investments, entry costs, and capital market transparency all affect the relative supply and demand for capital, and thus the relative bargaining power of entrepreneurs and venture capitalists. Relative bargaining power, in turn, affects equity shares and incentives. This finally affects the success probability, value, and valuation of start-ups. Moreover, we show that relative supply and demand conditions also determine the incentives of venture capitalists to screen projects ex ante. By characterizing both the short- and long-run dynamics of the venture capital industry, our model sheds light on the Internet boom and bust periods. The model is consistent with available empirical evidence and provides many novel empirical predictions.

Suggested Citation

Inderst, Roman and Mueller, Holger M., The Effect of Capital Market Characteristics on the Value of Start-Up Firms. Journal of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=415140

Roman Inderst

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60629
Germany
+49 (69) 798-34601 (Phone)
+49 (69) 798-35000 (Fax)

HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

Holger M. Mueller (Contact Author)

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
New York, NY 10012-1126
United States
212-998-0341 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~hmueller/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,339
PlumX Metrics