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Posturing and Holdup in Innovation

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  • Naveen Khanna
  • Richmond D. Mathews

Abstract

We show that the need to "posture" can help solve the holdup problem inherent in many multistage relationships, including those between entrepreneurs and venture capitalists. Posturing arises when an informed party needs to send a strong signal to induce skeptical third parties like employees, suppliers, customers, or competitors to develop/maintain relationships with the firm or take other actions that increase firm value. In the venture capital context, this can be credibly achieved if the VC publicly invests at high prices in later rounds. This tempers holdup by shifting ex-post bargaining power toward the entrepreneur, inducing him to exert greater effort. Received February 25, 2014; accepted October 7, 2015 by Editor Itay Goldstein.

Suggested Citation

  • Naveen Khanna & Richmond D. Mathews, 2016. "Posturing and Holdup in Innovation," The Review of Financial Studies, Society for Financial Studies, vol. 29(9), pages 2419-2454.
    • Handle: RePEc:oup:rfinst:v:29:y:2016:i:9:p:2419-2454.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhv071
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    Cited by:

    1. Michael Ewens & Nadya Malenko, 2020. "Board Dynamics over the Startup Life Cycle," NBER Working Papers 27769, National Bureau of Economic Research, Inc.
    2. Ndubuisi, Gideon, 2020. "Trust and R&D investments: evidence from OECD countries," Journal of Institutional Economics, Cambridge University Press, vol. 16(6), pages 809-830, December.
    3. Hellmann, Thomas & Thiele, Veikko, 2022. "May the force be with you: Investor power and company valuations," Journal of Corporate Finance, Elsevier, vol. 72(C).
    4. Fei Xie & Bohui Zhang & Wenrui Zhang, 2022. "Trust, Incomplete Contracting, and Corporate Innovation," Management Science, INFORMS, vol. 68(5), pages 3419-3443, May.
    5. Andreas Köhn, 2018. "The determinants of startup valuation in the venture capital context: a systematic review and avenues for future research," Management Review Quarterly, Springer, vol. 68(1), pages 3-36, February.
    6. Akshay Bhat, 2019. "Bounded Rationality, Motivation & Private Information And Its Implications On Contracts," Working papers 2019-32-07, Voice of Research.

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