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Early-stage entrepreneurial financing: A signaling perspective

Jin-Hyuk Kim () and Liad Wagman ()

Journal of Banking & Finance, 2016, vol. 67, issue C, 12-22

Abstract: We analyze an entrepreneur’s choice between angel and venture capital (VC) financing in a competitive investment market, where the entrepreneur seeks to maintain his ownership share as well as equity value. The key to our analysis is the idea that a negative signal is inferred by the market if an inside investor chooses not to follow on a subsequent investment. We first show that when ventures are ex-ante identical, entrepreneurs retain higher ownership shares by financing with angel investors who commit to not participate in a future round. When entrepreneurs are ex-ante heterogeneous, there is a separating equilibrium where entrepreneurs with higher (lower) likelihoods of success choose VC financing (angel financing) in the first round.

Keywords: Entrepreneurial financing; Insider signaling; Venture capital; Angel investing (search for similar items in EconPapers)
JEL-codes: G14 G24 D82 (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:eee:jbfina:v:67:y:2016:i:c:p:12-22