Adverse Selection, Investor Experience and Security Choice in Venture Capital Finance: Evidence from Germany

Thomas Hartmann†Wendels, Georg Keienburg and Soenke Sievers

European Financial Management, 2011, vol. 17, issue 3, 464-499

Abstract: This article analyses 336 German venture capital transactions from 1990 to 2005 and seeks to determine why selected financial securities differ across deals. We find that a broad array of financial instruments is used, covering straight equity, mezzanine and debt†like securities. Based on the chosen financial securities’ upside potential and downside protection characteristics, we provide an explanation for the differing use of these securities. Our results show that investors’ deal experience, adverse selection risks and economic prospects in the public equity market influence the selection of financial securities.

Date: 2011
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https://doi.org/10.1111/j.1468-036X.2010.00568.x

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