Financing a Portfolio of Projects

54 Pages Posted: 16 May 2006

See all articles by Holger M. Mueller

Holger M. Mueller

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Roman Inderst

Goethe University Frankfurt

Felix Münnich

London School of Economics & Political Science (LSE) - Financial Markets Group

Multiple version iconThere are 3 versions of this paper

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.

JEL Classification: G32, G34, D82

Suggested Citation

Mueller, Holger M. and Inderst, Roman and Muennich, Felix C., Financing a Portfolio of Projects. Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=901269

Holger M. Mueller (Contact Author)

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
New York, NY 10012-1126
United States
212-998-0341 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~hmueller/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Roman Inderst

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60629
Germany
+49 (69) 798-34601 (Phone)
+49 (69) 798-35000 (Fax)

HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

Felix C. Muennich

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
188
Abstract Views
2,049
Rank
265,230
PlumX Metrics