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Private Information and Bargaining Power in Venture Capital Financing

Journal of Economics and Management Strategy, Forthcoming

46 Pages Posted: 4 Mar 2008 Last revised: 7 Jun 2013

Yrjo Koskinen

Haskayne School of Business, University of Calgary

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management

Jun Wang

City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2013

Abstract

We model the natural evolution of private information over the life of a venture capitalist financed project. In the early stages, the entrepreneur is better informed regarding the project, and when the project matures, the venture capitalist has an informational advantage over the entrepreneur. Within this framework, we examine how the venture capitalist's relative bargaining power affects cash flow rights and investment. When the bargaining advantage lies with the entrepreneur, the project may not be screened, and the venture capitalist may acquiesce to excessive initial investment but subsequently terminate the project. Increased venture capitalist bargaining power encourages project screening, attenuates the incentive to overinvest, and reduces the incidence of project termination subsequent to the initial investment. The payoff sensitivity of venture capitalist's financing contract also increases as his bargaining power improves.

Keywords: Venture capital, Asymmetric information, Bargaining power, Financial contracting, Investment distortions

JEL Classification: G24, G32, D82

Suggested Citation

Koskinen, Yrjo and Rebello, Michael J. and Wang, Jun, Private Information and Bargaining Power in Venture Capital Financing (February 28, 2013). Journal of Economics and Management Strategy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=891192 or http://dx.doi.org/10.2139/ssrn.891192

Yrjo J Koskinen (Contact Author)

Haskayne School of Business, University of Calgary ( email )

SH 154, 2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
+1-403-220-5540 (Phone)

HOME PAGE: http://haskayne.ucalgary.ca/haskayne_info/profiles/yrjo-koskinen

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Jun Wang

City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

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