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Financial contracts and contingent control rights

Author

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  • Jukka Vauhkonen

    (Bank of Finland)

Abstract

According to empirical studies of venture capital finance, the division of control rights between entrepreneur and venture capitalists is often contingent on certain measures of firm performance. If the indicator of the company’s performance (eg earnings before taxes and interest) is low, the venture capital firm obtains full control of the company. If company performance improves, the entrepreneur retains or obtains more control rights. If company performance is very good, the venture capitalist relinquishes most of his control rights. In this article, we extend the incomplete contracting model of Aghion and Bolton to construct a theoretical model that is consistent with these empirical findings.

Suggested Citation

  • Jukka Vauhkonen, 2004. "Financial contracts and contingent control rights," Finance 0404022, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0404022
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    incomplete contracts; financial contracting; contingent contracts; control rights; joint ownership;
    All these keywords.

    JEL classification:

    • 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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