Advice and Monitoring in Venture Finance

Financial Markets and Portfolio Management, Vol. 21, No. 1, pp. 3-43, 2007

TILEC Discussion Paper No. 2005-003

41 Pages Posted: 4 Jan 2005

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Sofia Johan

Florida Atlantic University - Finance; Tilburg Law and Economics Center (TILEC)

Multiple version iconThere are 2 versions of this paper

Abstract

This paper provides empirical insights into the role of contracts and legal systems for managing investor-investee relationships along two dimensions: providing advice and addressing conflict. We examine a new detailed dataset from European venture capital (VC) funds. We match very specific contractual terms in VC contracts with the effort (total time spent) and advice that VCs provide to their entrepreneurial investee firms. We also analyze VC-entrepreneur conflicts. We compare the importance of contractual versus non-contractual governance mechanisms, as well as the role of legal systems in different countries for facilitating VC-entrepreneur relationships. The data indicate VC cash flow and control rights significantly facilitate effort and advice that VCs provide to entrepreneurs. VC-entrepreneur conflicts are closely tied to the quality of laws in which the entrepreneur resides: higher quality legal systems mitigate VC-entrepreneur conflicts. The data further indicate non-contractual governance mechanisms significantly facilitate VC advice and mitigate VC-entrepreneur conflicts. The results provide a unique unifying look into the role of actual VC contracts and legal settings versus other non-contractual governance mechanisms, risk and success potential on VC-entrepreneur relationships in an international context.

Keywords: Venture Capital, Monitoring, Advice

JEL Classification: G24, G28, G31, G32

Suggested Citation

Cumming, Douglas J. and Johan, Sofia A., Advice and Monitoring in Venture Finance. Financial Markets and Portfolio Management, Vol. 21, No. 1, pp. 3-43, 2007 ; TILEC Discussion Paper No. 2005-003 . Available at SSRN: https://ssrn.com/abstract=642122 or http://dx.doi.org/10.2139/ssrn.642122

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Sofia A. Johan (Contact Author)

Florida Atlantic University - Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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