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Early-stage entrepreneurial financing: A signaling perspective

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  • Kim, Jin-Hyuk
  • Wagman, Liad

Abstract

We analyze an entrepreneur’s choice between angel and venture capital (VC) financing in a competitive investment market, where the entrepreneur seeks to maintain his ownership share as well as equity value. The key to our analysis is the idea that a negative signal is inferred by the market if an inside investor chooses not to follow on a subsequent investment. We first show that when ventures are ex-ante identical, entrepreneurs retain higher ownership shares by financing with angel investors who commit to not participate in a future round. When entrepreneurs are ex-ante heterogeneous, there is a separating equilibrium where entrepreneurs with higher (lower) likelihoods of success choose VC financing (angel financing) in the first round.

Suggested Citation

  • Kim, Jin-Hyuk & Wagman, Liad, 2016. "Early-stage entrepreneurial financing: A signaling perspective," Journal of Banking & Finance, Elsevier, vol. 67(C), pages 12-22.
    • Handle: RePEc:eee:jbfina:v:67:y:2016:i:c:p:12-22
    DOI: 10.1016/j.jbankfin.2016.03.004
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    Cited by:

    1. Yung, Chris, 2019. "Entrepreneurial manipulation with staged financing," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 273-282.
    2. Tereza Tykvová, 2018. "Venture capital and private equity financing: an overview of recent literature and an agenda for future research," Journal of Business Economics, Springer, vol. 88(3), pages 325-362, May.
    3. Ana Venâncio & João Jorge, 2022. "The role of accelerator programmes on the capital structure of start-ups," Small Business Economics, Springer, vol. 59(3), pages 1143-1167, October.
    4. Xinyi Liu & Artit Wangperawong, 2018. "A Collaborative Approach to Angel and Venture Capital Investment Recommendations," Papers 1807.09967, arXiv.org.
    5. Jiajia Chang & Zhijun Hu & Hui Yang, 2020. "Venture Capital Contracting with Ambiguity Sharing and Effort Complementarity Effect," Mathematics, MDPI, vol. 8(1), pages 1-16, January.
    6. Thomas Ulmer & Ulrich Pape, 2022. "Streamliners, Switchmen and Bridge Builders: About the Mechanisms and Uniqueness of Accelerator Programs," Sustainability, MDPI, vol. 14(23), pages 1-25, November.
    7. Ali-Yrkkö, Jyrki & Pajarinen, Mika & Ylhäinen, Ilkka, 2019. "Business Angel Investment, Public Innovation Funding and Firm Growth," ETLA Reports 97, The Research Institute of the Finnish Economy.
    8. Cipollone, Angela & Giordani, Paolo E., 2019. "Entrepreneurs meet financiers: Evidence from the business angel market," Journal of Business Venturing, Elsevier, vol. 34(5), pages 1-1.
    9. Harrison, Richard T. & Bock, Adam J. & Gregson, Geoff, 2020. "Stairway to heaven? rethinking angel investment policy and practice," Journal of Business Venturing Insights, Elsevier, vol. 14(C).
    10. Block, Jörn H. & Fisch, Christian O. & Obschonka, Martin & Sandner, Philipp G., 2019. "A personality perspective on business angel syndication✰," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 306-327.
    11. Lennart Ante & Philipp Sandner & Ingo Fiedler, 2018. "Blockchain-Based ICOs: Pure Hype or the Dawn of a New Era of Startup Financing?," JRFM, MDPI, vol. 11(4), pages 1-19, November.
    12. Bracht, Felix & Mahieu, Jeroen & Vanhaverbeke, Steven, 2024. "The signaling value of legal form in entrepreneurial debt financing," Journal of Business Venturing, Elsevier, vol. 39(3).

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    More about this item

    Keywords

    Entrepreneurial financing; Insider signaling; Venture capital; Angel investing;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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