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Financing and Advising: Optimal Financial Contracts with Venture Capitalists
Author(s) -
Casamatta Catherine
Publication year - 2003
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/1540-6261.00597
Subject(s) - moral hazard , venture capital , finance , business , convertible , incentive , social venture capital , investment (military) , productivity , value (mathematics) , joint venture , economics , microeconomics , commerce , structural engineering , machine learning , politics , political science , law , computer science , engineering , macroeconomics
This paper analyses the joint provision of effort by an entrepreneur and by an advisor to improve the productivity of an investment project. Without moral hazard, it is optimal that both exert effort. With moral hazard, if the entrepreneur's effort is more efficient (less costly) than the advisor's effort, the latter is not hired if she does not provide funds. Outside financing arises endogenously. This explains why investors like venture capitalists are value enhancing. The level of outside financing determines whether common stocks or convertible bonds should be issued in response to incentives.