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Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses

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Author Info
STEVEN N. KAPLAN
PER STRÖMBERG

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Abstract

We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs describe the strengths and risks of the investments as well as expected postinvestment actions. We classify the risks into three categories and relate them to the allocation of cash flow rights, contingencies, control rights, and liquidation rights between VCs and entrepreneurs. The risk results suggest that agency and hold-up problems are important to contract design and monitoring, but that risk sharing is not. Greater VC control is associated with increased management intervention, while greater VC equity incentives are associated with increased value-added support. Copyright 2004 by The American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 59 (2004)
Issue (Month): 5 (October)
Pages: 2177-2210
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Handle: RePEc:bla:jfinan:v:59:y:2004:i:5:p:2177-2210

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  16. Giacinta CESTONE, 2001. "Venture Capital Meets Contract Theory: Risky Claims or Formal Control?," UFAE and IAE Working Papers 480.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
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  17. Steven N. Kaplan & Per Stromberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," Review of Economic Studies, Blackwell Publishing, vol. 70(2), pages 281-315, 04. [Downloadable!] (restricted)
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