Specialist versus generalist investors: Trading off support quality, investment horizon and control rights

Guillaume Andrieu and Alexander Peter Groh ()
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Guillaume Andrieu: MRM - Montpellier Research in Management - UPVM - Université Paul-Valéry - Montpellier 3 - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School - UM - Université de Montpellier
Alexander Peter Groh: EM - EMLyon Business School

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Abstract: We model an entrepreneur's selection of either an active (specialist) or a passive (generalist) investor for an innovative venture that requires external equity for startup and expansion financing. We assume that the specialist investor provides better support but has a shorter investment horizon than the generalist. We particularly focus on the entrepreneur's net present value (NPV)-maximizing contract, taking into account the specialist's potential moral hazard. This latter might try selling his claim in a secondary transaction to an uninformed outside investor, even though the project is unsuccessful and should be abandoned. We show that the entrepreneur may trade off crucial contract parameters when seeking external financing. Either type of investor may be preferable, contingent on the allocation of control rights, the investor's support quality and investment horizon, the chances of success, and the venture's expected liquidation value.

Keywords: Allocation of control rights; Investment horizon; Entrepreneurial finance; Venture capital; Business angels (search for similar items in EconPapers)
Date: 2018-01
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Citations: View citations in EconPapers (3)

Published in European Economic Review, 2018, 101, pp.459-478. ⟨10.1016/j.euroecorev.2017.10.012⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02008995

DOI: 10.1016/j.euroecorev.2017.10.012

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