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Venture Capital and the Use of Convertible Securities and Control Rights Covenants: A Fuzzy Set Approach

Author

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  • Maria do Rosario Correia

    (German University of Cairo, Egypt)

  • Raquel F. Ch. Meneses

    (Universidade do Porto, Portugal)

Abstract

Although venture capital is considered crucial for promoting economic development and innovation, not much has been done regarding the use of complex financing contracts in venture capital backed investments. In this study we investigate the use of convertible securities and control rights covenants for a sample of 15 Portuguese venture capital firms. We use a relatively new methodology in business and management sciences - fuzzy set Qualitative Comparative Analysis - that considers both quantitative and qualitative factors for obtaining a solution that best fits the empirical data. Our results show that the use of convertible securities is affected by the anticipated severity of double-sided moral hazard problems. On the other hand, only a weak support is provided to the agency predictions regarding the use of control right covenants. Interestingly, the results reveal that convertible securities, unlike control rights covenants, are the most apt instruments to reduce costly double-sided incentive problems of a venture capital relationship.

Suggested Citation

  • Maria do Rosario Correia & Raquel F. Ch. Meneses, 2019. "Venture Capital and the Use of Convertible Securities and Control Rights Covenants: A Fuzzy Set Approach," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 5(1), pages 5-20.
    • Handle: RePEc:men:journl:v:5:y:2019:i:1:p:5-20
    DOI: 10.11118/ejobsat.v5i1.152
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    More about this item

    Keywords

    venture capital; convertible securities; control right covenants; agency costs; fuzzy set theory;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • 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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