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Specialist versus Generalist Investors : Trading off Support Quality, Investment Horizon and Control Rights

Author

Listed:
  • Guillaume Andrieu

    (Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School)

  • Alexander Groh

    (EM - EMLyon Business School)

Abstract

We model an entrepreneur's selection of either an active (specialist) or a passive (generalist) investor for an innovative venture that requires external equity for startup and expansion financing. We assume that the specialist investor provides better support but has a shorter investment horizon than the generalist. We particularly focus on the entrepreneur's net present value (NPV)-maximizing contract, taking into account the specialist's potential moral hazard. This latter might try selling his claim in a secondary transaction to an uninformed outside investor, even though the project is unsuccessful and should be abandoned. We show that the entrepreneur may trade off crucial contract parameters when seeking external financing. Either type of investor may be preferable, contingent on the allocation of control rights, the investor's support quality and investment horizon, the chances of success, and the venture's expected liquidation value.

Suggested Citation

  • Guillaume Andrieu & Alexander Groh, 2018. "Specialist versus Generalist Investors : Trading off Support Quality, Investment Horizon and Control Rights," Post-Print hal-02312089, HAL.
    • Handle: RePEc:hal:journl:hal-02312089
    DOI: 10.1016/j.euroecorev.2017.10.012
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    Cited by:

    1. Andrieu, Guillaume & Peter Groh, Alexander, 2021. "Strategic exits in secondary venture capital markets," Journal of Business Venturing, Elsevier, vol. 36(2).
    2. Bhattacharya, Abhi & Sardashti, Hanieh, 2022. "The differential effect of new product preannouncements in driving institutional and individual investor ownership," Journal of Business Research, Elsevier, vol. 149(C), pages 811-823.
    3. Chircop, Justin & Johan, Sofia & Tarsalewska, Monika, 2020. "Does religiosity influence venture capital investment decisions?," Journal of Corporate Finance, Elsevier, vol. 62(C).

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