Growth Firms and Relationship Finance: A Capital Structure Perspective

Roman Inderst and Vladimir Vladimirov ()
Additional contact information
Vladimir Vladimirov: University of Amsterdam, 1012 WX Amsterdam, Netherlands

Management Science, 2019, vol. 65, issue 11, 5411-5426

Abstract: We analyze how relationship finance, such as venture capital and relationship lending, affects growth firms’ capital structure choices. We show that relationship investors that obtain a strong bargaining position because of their privileged information about the firm optimally cash in on their dominance by pushing it to finance follow-up investments with equity. The firm underinvests if its owner refuses to accept the associated dilution. However, this problem is mitigated if the firm’s initial relationship financing involves high leverage or offers initial investors preferential treatment in liquidation. By contrast, if initial investors are unlikely to gain a dominant position, firms optimally lever up only in later rounds. Our implications for relationship and venture capital financing highlight that the degree of investor dominance is of key importance for growth firms’ capital structure decisions.

Keywords: financial contracting; relationship financing; dominant investors; equity financing; growth firms (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://doi.org/10.1287/mnsc.2018.3076 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:65:y:2019:i:11:p:5411-5426

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().