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Optimal ownership of entrepreneurial firms with rational inattention

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  • Zhang, Yuhua
  • Mu, Congming

Abstract

By introducing rational inattention into the setting in which an entrepreneurial firm has a growth option but has to issue equity to raise funds from a venture capitalist, we study the effects of the two parties’ information flow constraint on the investment and ownership allocation. The results show that the larger the information-processing capacity, the later the option exercise and that the advantage of information processing increases the agent’s ownership, generating a negative relationship between management ownership and option investment. The uncertainty in the profit flow enhances the advantage of information processing by allowing the agent with larger capacity to hold a greater ownership, whereas the effects of the long-term mean of profit flow depends on whether it is high or low and the reversion speed of profit flow almost has no contribution to the effects of advantage of information processing on the ownership allocation.

Suggested Citation

  • Zhang, Yuhua & Mu, Congming, 2021. "Optimal ownership of entrepreneurial firms with rational inattention," Economics Letters, Elsevier, vol. 209(C).
    • Handle: RePEc:eee:ecolet:v:209:y:2021:i:c:s0165176521003931
    DOI: 10.1016/j.econlet.2021.110116
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    1. Avoyan, Ala & Romagnoli, Giorgia, 2023. "Paying for inattention," Economics Letters, Elsevier, vol. 226(C).

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    More about this item

    Keywords

    Rational inattention; Information flow constraint; Growth option; Entrepreneurial finance; Venture capital;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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