The Use of Covenants: An Empirical Analysis of Venture Partnership Agreements

Posted: 11 Apr 1995

See all articles by Paul A. Gompers

Paul A. Gompers

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 1995

Abstract

This paper examines covenants in 140 partnership agreements establishing venture capital funds that were executed between 1978 and 1992. Despite the similar objectives and structures of these funds and the relatively limited number of contracting parties, the agreements are quite heterogeneous in their inclusion of covenants. We examine two hypotheses that suggest when covenants will be included or omitted. First, covenant use may be determined by the extent of agency problems: because covenants are costly to negotiate and monitor, they will only be employed when these problems are severe. Alternatively, covenant use may reflect the venture capitalists' market power. Market power may shift if the demand for venture capital services changes while the supply of these services remains fixed in the short run. The evidence is consistent with both hypotheses. This is in contrast to previous results which have either focused exclusively on costly contracting or provided only weak support for market power.

JEL Classification: G24, K12

Suggested Citation

Gompers, Paul A. and Lerner, Josh, The Use of Covenants: An Empirical Analysis of Venture Partnership Agreements (January 1995). Available at SSRN: https://ssrn.com/abstract=6086

Paul A. Gompers (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6297 (Phone)
617-496-8443 (Fax)

Harvard University - Entrepreneurial Management Unit ( email )

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

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

HOME PAGE: http://www.ecgi.org

Josh Lerner

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6065 (Phone)
617-496-7357 (Fax)

HOME PAGE: http://www.people.hbs.edu/jlerner/

Harvard University - Entrepreneurial Management Unit

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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