Adverse Selection and Capital Structure: Evidence from Venture Capital
35 Pages Posted: 14 Mar 2001 Last revised: 10 Sep 2008
There are 2 versions of this paper
Adverse Selection and Capital Structure: Evidence from Venture Capital
Adverse Selection and Capital Structure: Evidence from Venture Capital
Abstract
Recent non-U.S. venture capitalist datasets around the world have consistently reported the use of a variety of instruments by venture capital funds around the world, including common equity, preferred equity, convertible preferred equity, debt, convertible debt, and combinations (in the U.S., venture capitalists typically use convertible preferred equity, and there is a tax bias in favour of that instrument in the U.S.). The types of entrepreneurial firms that receive venture finance may be defined by a variety of characteristics, such as stage of development, type of industry, and capital requirements. Given this broad context observed in practice, previous research has not considered the extent to which different securities, among the complete class of forms of finance, attract different types of entrepreneurial firms. In this paper we investigate the empirical tractability of the adverse selection risks associated with capital structure from 4114 Canadian venture capital investments. We characterize of the nature of uncertainty (in terms of the risk of financing a lemon or a nut) facing investors for different types of entrepreneurial firms. We show that venture capitalist syndication significantly mitigates problems of adverse selection.
Keywords: Financial contracting, capital structure, adverse selection, entrepreneurship, venture capital
JEL Classification: G24, G28, G32, G38
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Steven N. Kaplan and Per Strömberg
-
By Steven N. Kaplan and Per Strömberg
-
Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets
By Ronald J. Gilson and Bernard S. Black
-
Money Chasing Deals?: The Impact of Fund Inflows on Private Equity Valuations
By Paul A. Gompers and Josh Lerner
-
Private Equity Performance: Returns, Persistence and Capital Flows
-
Private Equity Performance: Returns, Persistence and Capital
-
The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?
-
Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence
By Thomas F. Hellmann and Manju Puri