Staged investments in entrepreneurial financing

Sandeep Dahiya and Korok Ray

Journal of Corporate Finance, 2012, vol. 18, issue 5, 1193-1216

Abstract: Venture capitalists deliver investments to entrepreneurs in stages. This paper shows staged financing is efficient. Staging lets investors abandon ventures with low early returns, and thus sorts good projects from bad. The primary implication from staging is that it is efficient to invest more in later rounds. The model yields a number of predictions on how the ratio of early to late round financing varies with uncertainty, the outside options of both parties, the value of the venture, the costs of investment, and project difficulty. We test these predictions against data on venture capital financings and find significant empirical support for the theory.

Keywords: Entrepreneurship; Venture capital; Staged financing; Optimal stopping; Performance evaluation; Financial contracting (search for similar items in EconPapers)
JEL-codes: C12 C39 C79 G28 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:18:y:2012:i:5:p:1193-1216

DOI: 10.1016/j.jcorpfin.2012.07.002

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