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Venture Capitalists, Asymmetric Information and Ownership in the Innovation Process

Simona Fabrizi (), Steffen Lippert (), Pehr-Johan Norbäck () and Lars Persson

MPRA Paper from University Library of Munich, Germany

Abstract: This paper constructs a model where entrepreneurial innovations are sold into oligopolistic industries and where adverse selection problems between entrepreneurs, venture capitalists and incumbents are present. We first show that aggressive development of a basic innovation by better informed venture-backed firms is used as a signaling device to enhance the sale price of the innovation. We then show that incumbents can undertake early, preemptive, acquisitions to prevent such signaling driven overinvestment, despite the risk of buying a non-productive innovation. Therefore, to exist in equilibrium, venture capitalists must be sufficiently more efficient in selecting innovation projects, otherwise preemptive acquisitions will take place.

Keywords: venture-backed firm; innovation; signaling; overinvestment; interim development; M&A (search for similar items in EconPapers)
JEL-codes: D21 L2 C7 D82 M13 G24 O3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ent, nep-ino, nep-mic, nep-ppm and nep-tid
Date: 2007-11-15
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