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May the force be with you: Investor power and company valuations

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  • Hellmann, Thomas
  • Thiele, Veikko

Abstract

This paper re-examines the role of investor power in a model of staged equity financing. It shows how the usual effect where market power reduces valuations can be reversed in later rounds. Once they become insiders, powerful investors may use their market power to increase, not decrease valuations. The critical determinant is whether the insider invests above or below the pro-rata threshold. Even though powerful investors initially lower valuations, companies prefer to bring them inside, to leverage their power in later financing rounds. The paper generates novel predictions about valuations and investor returns.

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  • Hellmann, Thomas & Thiele, Veikko, 2022. "May the force be with you: Investor power and company valuations," Journal of Corporate Finance, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:corfin:v:72:y:2022:i:c:s0929119922000062
    DOI: 10.1016/j.jcorpfin.2022.102163
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    1. William H. Janeway & Ramana Nanda & Matthew Rhodes-Kropf, 2021. "Venture Capital Booms and Start-Up Financing," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 111-127, November.

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    More about this item

    Keywords

    Staged financing; Valuation; Inside investor; Market power;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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