Risk, Self Selection and Advice: Banks Versus Venture Capitalists

23 Pages Posted: 4 Mar 2002

See all articles by Martin D. Dietz

Martin D. Dietz

University of St. Gallen - Institute of Public Finance and Fiscal Law

Date Written: February 27, 2002

Abstract

Venture capital has produced an impressive track record in recent years. But the industry is very focused on specific industries and special types of companies. The paper analyses this market separation between bank financed and venture capital backed companies. I find that both venture capitalist and entrepreneur prefer to finance risky projects using venture capital while secure ones should use ordinary bank finance. Distortion in this positive self-selection process is caused by an overinvestment mechanism which allows some low quality entrepreneurs to profit from the venture capitalist's advice. This in turn provides incentives for him to use screening.

JEL Classification: D82, G24, L11

Suggested Citation

Dietz, Martin D., Risk, Self Selection and Advice: Banks Versus Venture Capitalists (February 27, 2002). Available at SSRN: https://ssrn.com/abstract=302080 or http://dx.doi.org/10.2139/ssrn.302080

Martin D. Dietz (Contact Author)

University of St. Gallen - Institute of Public Finance and Fiscal Law ( email )

Varnbuelstrasse 19
St. Gallen, CH-9000
Switzerland
+41 71 224 3086 (Phone)
+41 71 224 2670 (Fax)

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