Financing a Portfolio of Projects

Roman Inderst, Holger Mueller and Felix Muennich

No 5711, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper shows that investors financing a portfolio of projects may use the depth of their financial pockets to overcome entrepreneurial incentive problems. While competition for scarce informed capital at the refinancing stage increases the investor?s ex post bargaining position, it may nevertheless improve entrepreneurs? ex ante incentives. This is because projects funded by investors with 'shallow pockets' must have not only a positive NPV at the refinancing stage, but one that is higher than that of competing portfolio projects. We also show that, besides mitigating moral hazard, committing to shallow pockets may have benefits in dealing with adverse selection problems. Our paper may help to understand provisions used in venture capital finance that limit a fund?s initial capital and make it difficult to add on more capital once the initial venture capital fund is raised. Our paper also provides a number of empirical implications, some of which have not yet been tested.

Keywords: Venture capital portfolio; Deep versus shallow pockets (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2006-06
New Economics Papers: this item is included in nep-bec, nep-ent and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Financing a portfolio of projects (2009)
Journal Article: Financing a Portfolio of Projects (2006)
Working Paper: Financing a portfolio of projects (2006)
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