Research Discussion Papers, Bank of Finland
No 14/2003:
Financial contracts and contingent control rights
Jukka Vauhkonen ()
Abstract: According to empirical studies of venture capital finance,
the division of control rights between entrepreneur and venture capitalists
is often contingent on certain measures of firm performance. If the
indicator of the company’s performance (eg earnings before taxes and
interest) is low, the venture capital firm obtains full control of the
company. If company performance improves, the entrepreneur retains or
obtains more control rights. If company performance is very good, the
venture capitalist relinquishes most of his control rights. In this
article, we extend the incomplete contracting model of Aghion and Bolton to
construct a theoretical model that is consistent with these empirical
findings.
Keywords: incomplete contracts; financial contracting; contingent contracts; control rights; joint ownership; (follow links to similar papers)
JEL-Codes: G32; (follow links to similar papers)
37 pages, May 12, 2003
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