(), Michael J. Rebello
and Jun Wang
Yrjo Koskinen: Boston University School of Management and CEPR
Michael J. Rebello: Tulane University
Jun Wang: Baruch College
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.
52 pages, First version: September 15, 2006. Revised: February 8, 2011.
Note: Please find updated version on http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=105962
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