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Bank as a Venture Capitalist

Kumar Rishabh

Working papers from Faculty of Business and Economics - University of Basel

Abstract: Banks all over the world show interest in acting as venture capitalists. In this paper, I argue that banks offer venture capital (VC) financing along with traditional (collateralized) loans in response to the natural constraints of the hidden information that they face. Innovative entrepreneurs pursue new technology that promises high return but runs a high risk of failure. The more innovative entrepreneurs also have higher reservation utility. This interaction between type-dependent returns and reservation utility creates a situation where collateral alone is not sufficient to screen entrepreneurs, and the uninformed bank needs an additional screening device. VC fulfils that role.

Keywords: Bank; Venture Capital; Collateral; Debt; Screening (search for similar items in EconPapers)
JEL-codes: D86 G21 G24 (search for similar items in EconPapers)
Date: 2021-08-31
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-cwa, nep-ent, nep-fdg and nep-isf
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