Private Information and Bargaining Power in Venture Capital Financing

Yrjö Koskinen (), Michael J. Rebello and Jun Wang ()
Additional contact information
Michael J. Rebello: Tulane University
Jun Wang: Baruch College

No 45, SIFR Research Report Series from Institute for Financial Research

Abstract: We examine how the relative bargaining power of privately informed venture capitalists and entrepreneurs - determined either by market conditions or by prior experience - affects both the willingness of venture capitalists to invest and the terms of their financing contracts. Our results demonstrate that shifts in the venture capitalists' bargaining power have a profound influence both on the terms of contracts and on investments in venture-backed projects. As witnessed in the recent past, when the bargaining advantage lies with entrepreneurs, venture capitalists may acquiesce to both investing in negative NPV projects and excessive investments in early stages of projects. Further, they will subsequently terminate poor projects. An improvement in the bargaining position of venture capitalists increases the payoff sensitivity of their financing contracts. It also completely attenuates their incentive to overinvest, limiting the need for excessive project terminations arter the initial round of financing.

Keywords: Venture capital; asymmetric information; bargaining power; financial contracting; investment distortions (search for similar items in EconPapers)
JEL-codes: D82 G24 G32 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2006-09-15, Revised 2011-02-08
New Economics Papers: this item is included in nep-ent and nep-fin
Note: Please find updated version on http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=105962
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Forthcoming as Koskinen, Yrjo, Michael J. Rebello and Jun Wang, 'Private Information and Bargaining Power in Venture Capital Financing' in Journal of Economics and Management Strategy.

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Related works:
Journal Article: Private Information and Bargaining Power in Venture Capital Financing (2014)
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