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Specialist versus generalist investors: Trading off support quality, investment horizon and control rights

Guillaume Andrieu and Alexander Peter Groh

European Economic Review, 2018, vol. 101, issue C, 459-478

Abstract: We model an entrepreneur’s selection of either an active (specialist) or a passive (generalist) investor for an innovative venture that requires external equity for startup and expansion financing. We assume that the specialist investor provides better support but has a shorter investment horizon than the generalist. We particularly focus on the entrepreneur’s net present value (NPV)-maximizing contract, taking into account the specialist’s potential moral hazard. This latter might try selling his claim in a secondary transaction to an uninformed outside investor, even though the project is unsuccessful and should be abandoned. We show that the entrepreneur may trade off crucial contract parameters when seeking external financing. Either type of investor may be preferable, contingent on the allocation of control rights, the investor’s support quality and investment horizon, the chances of success, and the venture’s expected liquidation value.

Keywords: Allocation of control rights; Investment horizon; Entrepreneurial finance; Venture capital; Business angels (search for similar items in EconPapers)
JEL-codes: D81 G21 G24 G32 L26 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.euroecorev.2017.10.012

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