Venture Capital Financing: The Role of Bargaining Power and the Evolution of Informational Asymmetry

56 Pages Posted: 11 Oct 2006

See all articles by Yrjo Koskinen

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, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: August 2006

Abstract

We model a situation where the entrepreneur has an informational advantage during the early stages of an investment project while the venture capitalist has the informational advantage during the later stages. We examine how this evolution of informational asymmetry affects venture investment and the nature of financing contracts under two different scenarios with regard to the distribution of bargaining power between the venture capitalist and entrepreneur: when the venture capitalist has the bargaining advantage and when the entrepreneur has the bargaining advantage. Our results demonstrate that the distribution of bargaining power has a profound influence both on the terms of contracts and on investments in venture-backed projects. Changes in bargaining power can completely alter the payoff sensitivity of contracts offered to entrepreneurs, and, as witnessed in the recent past, when entrepreneurs hold the bargaining advantage, venture capitalists may acquiesce to excessive investments in early stages of projects and subsequently terminate a larger number of projects.

Keywords: Asymmetric information, financial contracting, venture capital, bargaining power, investment distortions

JEL Classification: D82, G24, G32

Suggested Citation

Koskinen, Yrjo J and Rebello, Michael J. and Wang, Jun, Venture Capital Financing: The Role of Bargaining Power and the Evolution of Informational Asymmetry (August 2006). CEPR Discussion Paper No. 5806. Available at SSRN: https://ssrn.com/abstract=936737

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://contacts.ucalgary.ca/info/ha/profiles/1-7257931

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, 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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