Posturing and Holdup in Innovation

Naveen Khanna and Richmond D. Mathews

The Review of Financial Studies, 2016, vol. 29, issue 9, 2419-2454

Abstract: We show that the need to "posture" can help solve the holdup problem inherent in many multistage relationships, including those between entrepreneurs and venture capitalists. Posturing arises when an informed party needs to send a strong signal to induce skeptical third parties like employees, suppliers, customers, or competitors to develop/maintain relationships with the firm or take other actions that increase firm value. In the venture capital context, this can be credibly achieved if the VC publicly invests at high prices in later rounds. This tempers holdup by shifting ex-post bargaining power toward the entrepreneur, inducing him to exert greater effort. Received February 25, 2014; accepted October 7, 2015 by Editor Itay Goldstein.

Date: 2016
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