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Growth Firms and Relationship Finance: A Capital Structure Approach

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  • Inderst, Roman
  • Vladimirov, Vladimir

Abstract

We analyze how relationship finance, such as venture capital and relationship lending, affects growth firm's capital structure choices. We show that relationship investors that obtain a strong bargaining position due to their privileged information about the firm, optimally cash in on their dominance by pushing it to finance follow-up investments with equity. The firm underinvests if its owner refuses to accept the associated dilution. However, this problem is mitigated if the firm's initial relationship financing involves high leverage or offers initial investors preferential treatment in liquidation. By contrast, if initial investors are unlikely to gain a dominant position, firms optimally lever up only in later rounds. Our implications for relationship and venture capital financing highlight that the degree of investor dominance is of key importance for growth firm's capital structure decisions.

Suggested Citation

  • Inderst, Roman & Vladimirov, Vladimir, 2019. "Growth Firms and Relationship Finance: A Capital Structure Approach," CEPR Discussion Papers 13640, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13640
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    References listed on IDEAS

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    Cited by:

    1. Suting Hong & Konstantinos Serfes & Veikko Thiele, 2020. "Competition in the venture capital market and the success of startup companies: Theory and evidence," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(4), pages 741-791, October.
    2. Albert Danso & Samuel Fosu & Samuel Owusu‐Agyei & Collins G. Ntim & Emmanuel Adegbite, 2021. "Capital structure revisited. Do crisis and competition matter in a Keiretsu corporate structure?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5073-5092, October.
    3. Arnoud Boot & Vladimir Vladimirov, 2019. "(Non-)Precautionary Cash Hoarding and the Evolution of Growth Firms," Management Science, INFORMS, vol. 65(11), pages 5290-5307, November.

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    Keywords

    Financial contracting; Relationship financing; Dominant investors; Equity financing;
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