The Effect of Risk Aversion and Cash Flow Risk on the Equity Share Distribution in the Entrepreneur and Venture Capital Contract

María Florencia Gabrielli and Marcos Vergara
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María Florencia Gabrielli: Universidad del Desarrollo
Marcos Vergara: Universidad del Desarrollo

No 398, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: We study the impact of risk aversion and cash flow risk on the allocation of equity shares between entrepreneurs and venture capitalists in a setting characterized by double-sided moral hazard. Cash flows are simultaneously influenced by both price risk and background risk. We evaluate the main results of the model through simulation exercises that highlight the parameters that influence the dynamics of optimal equity share in project cash ows, such as the entrepreneur's risk aversion relative to the VC's and other partner attributes like the productivity and efficiency of their respective efforts. We carried out the analysis under different risk and effort complementarity scenarios. We find that the productivity and efficiency of partners' efforts are dominated by their risk aversion, and that the slope of the effect of these traits on the optimal equity share trajectory is modi ed by risk parameters and effort complementarity.

Keywords: Risk aversion; risk; equity share; financial contracting (search for similar items in EconPapers)
JEL-codes: D81 D86 L26 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2026-06
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:398

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