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Mitigation of Moral Hazard and Adverse Selection in Venture Capital Financing: The Influence of the Country's Institutional Setting

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  • Cristiano Bellavitis
  • Dzidziso Samuel Kamuriwo
  • Ulrich Hommel

Abstract

A venture capitalist (VC) needs to trade off benefits and costs when attempting to mitigate agency problems in their investor‐investee relationship. We argue that signals of ventures complement the VC's capacity to screen and conduct a due diligence during the preinvestment phase, but its attractiveness may diminish in institutional settings supporting greater transparency. Similarly, whereas a VC may opt for contractual covenants to curb potential opportunism by ventures in the postinvestment phase, this may only be effective in settings supportive of shareholder rights enforcement. Using an international sample of VC contracts, our study finds broad support for these conjectures. It delineates theoretical and practical implications for how investors can best deploy their capital in different institutional settings while nurturing their relationships with entrepreneurs.

Suggested Citation

  • Cristiano Bellavitis & Dzidziso Samuel Kamuriwo & Ulrich Hommel, 2019. "Mitigation of Moral Hazard and Adverse Selection in Venture Capital Financing: The Influence of the Country's Institutional Setting," Journal of Small Business Management, Taylor & Francis Journals, vol. 57(4), pages 1328-1349, October.
    • Handle: RePEc:taf:ujbmxx:v:57:y:2019:i:4:p:1328-1349
    DOI: 10.1111/jsbm.12391
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    Cited by:

    1. Julian Bafera & Simon Kleinert, 2023. "Signaling Theory in Entrepreneurship Research: A Systematic Review and Research Agenda," Entrepreneurship Theory and Practice, , vol. 47(6), pages 2419-2464, November.
    2. Li, Zhaotong & Wu, Min & Teo, Chee-Chong & Yuen, Kum Fai, 2024. "An investigation of consumer switching intention on the use of automated courier station from a signaling perspective," Journal of Retailing and Consumer Services, Elsevier, vol. 78(C).

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