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Robust Financial Contracting and the Role of Venture Capitalists
Author(s) -
ADMATI ANAT R.,
PFLEIDERER PAUL
Publication year - 1994
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/j.1540-6261.1994.tb05146.x
Subject(s) - venture capital , business , incentive , stochastic game , finance , agency (philosophy) , investment (military) , social venture capital , fraction (chemistry) , monetary economics , economics , microeconomics , philosophy , epistemology , politics , political science , law , chemistry , organic chemistry
We derive a role for inside investors, such as venture capitalists, in resolving various agency problems that arise in a multistage financial contracting problem. Absent an inside investor, the choice of securities is unlikely to reveal all private information, and overinvestment may occur. An inside investor, however, always makes optimal investment decisions if and only if he holds a fixed‐fraction contract, where he always receives a fixed fraction of the project's payoff and finances that same fraction of future investments. This contract also eliminates any incentives of the venture capitalist to misprice securities issued in later financing rounds.