SIFR Research Report Series, Institute for Financial Research
Private Information and Bargaining Power in Venture Capital Financing
(), Michael J. Rebello and Jun Wang
Abstract: We examine how the relative bargaining power of privately
informed venture capitalists and entrepreneurs - determined either by
market conditions or by prior experience - affects both the willingness of
venture capitalists to invest and the terms of their financing contracts.
Our results demonstrate that shifts in the venture capitalists' bargaining
power have a profound influence both on the terms of contracts and on
investments in venture-backed projects. As witnessed in the recent past,
when the bargaining advantage lies with entrepreneurs, venture capitalists
may acquiesce to both investing in negative NPV projects and excessive
investments in early stages of projects. Further, they will subsequently
terminate poor projects. An improvement in the bargaining position of
venture capitalists increases the payoff sensitivity of their financing
contracts. It also completely attenuates their incentive to overinvest,
limiting the need for excessive project terminations arter the initial
round of financing.
Keywords: Venture capital; asymmetric information; bargaining power; financial contracting; investment distortions; (follow links to similar papers)
JEL-Codes: D82; G24; G32; (follow links to similar papers)
52 pages, September 15, 2006, Revised February 8, 2011
Please find updated version on http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=105962
Before downloading any of the electronic versions below
you should read our statement on
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
- This paper is forthcoming as:
Koskinen, Yrjo, Michael J. Rebello and Jun Wang, 'Private Information and Bargaining Power in Venture Capital Financing', Journal of Economics and Management Strategy.
Questions (including download problems) about the papers in this series should be directed to Anki Helmer ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design by Joachim Ekebom