Adverse selection, Investor Experience and Security Choice in Venture Capital Finance: Evidence from Germany

2010 ◽  
Author(s):  
Thomas Hartmann-Wendels ◽  
Georg Keienburg ◽  
Soenke Sievers
Keyword(s):  
Venture Capital ◽  
Adverse Selection

Mitigating Moral Hazard and Adverse Selection in Venture Capital Industry

2015 ◽  
Vol 2015 (1) ◽  
pp. 10526
Author(s):  
Dzidziso Samuel Kamuriwo ◽  
Cristiano Bellavitis ◽  
Ulrich Hommel
Keyword(s):  
Venture Capital ◽  
Moral Hazard ◽  
Adverse Selection

Adverse selection analysis for profit and loss sharing contracts

2019 ◽  
Vol 12 (4) ◽  
pp. 532-552
Author(s):  
Hechem Ajmi ◽  
Hassaneddeen Abd Aziz ◽  
Salina Kassim ◽  
Walid Mansour
Keyword(s):  
Monte Carlo Simulation ◽  
Monte Carlo ◽  
Venture Capital ◽  
Adverse Selection ◽  
Conflicts Of Interest ◽  
Firm Dynamics ◽  
Profit Sharing ◽  
Market Frictions ◽  
Content Type ◽  
Selection Analysis

Purpose The purpose of this paper is to determine the optimal profit-and-loss sharing (PLS)-based contract when market frictions occur. Design/methodology/approach This paper opts for an adverse selection analysis and Monte Carlo simulation to assess the less risky contract for the principal and the agent when musharakah, mudarabah and venture capital financings are used in imperfect markets. Furthermore, this framework enables us to capture the level of market frictions that the principal can bear and the level of audit that he/she may undertake to mitigate bankruptcy. Findings The simulation results reveal that Musharakah is the less risky contract for the principal compared to Mudarabah and venture capital when the shock is low and high. Furthermore, our findings indicate that the increase of market frictions engender higher audit cost and profit-sharing ratios. The increase of the safety index in the case of high shock is most likely attributed to the increase of the audit parameter for all contracts to mitigate the selfish behavior of the agent. Accordingly, the principal tends to require a higher profit-sharing ratio to compensate for the severer information asymmetry. Research limitations/implications This paper has two main limits. First, the results were not compared to real data because the latter are not available. Second, this paper is a general framework to determine the less risky contract for the principal and does not consider the firm and sectoral characteristics. However, it can be extended in various ways where stress can be put on conflicts of interest between the principal and the agent with the aim to determine the contract that aligns their interests. In addition, the examination of firm dynamics in the case of equity and debt financing can provide further arguments for economic agents regarding the value of the firm, the growth rate and the lifetime of the project when information is asymmetrically distributed. Practical implications The findings shed some light on the necessity of the Islamic finance experts to re-think of the promotion of Musharakah because it dominates the two other contracts when market frictions occur. Social implications Although Maghrabi and Mirakhor (2015), Alanzi and Lone (2015) and Lone and Ahmad (2017) among others showed that profit and loss sharing can ensure economic growth, findings may motivate economic players to consider Musharakah financing with the aim to reach financial inclusion and social, which is in line with Shari’ah requirements and Islamic values. Originality/value Although several papers highlighted the financial contracting theory from Shari’ah perspective, they ignored the financial issues that are associated to adverse selection. This paper provides theoretical evidence regarding the selection of the less risky financing mode in case of equity financing using Monte Carlo simulation.

scholarly journals Enterprises’ R&D Investment, Venture Capital Syndication and IPO Underpricing

2021 ◽  
Vol 13 (13) ◽  
pp. 7290
Author(s):  
Xuemeng Guo ◽  
Kai Li ◽  
Siyi Yu ◽  
Bolu Wei
Keyword(s):  
Venture Capital ◽  
Information Asymmetry ◽  
Adverse Selection ◽  
Significant Positive Correlation ◽  
Ipo Underpricing ◽  
Positive Correlation ◽  
The Relationship ◽  
D Investment

Based on the data of companies that got ChiNext listed from 2009 to 2018, this paper empirically studies the relationship among R&D investment, venture capital (VC) syndication and IPO underpricing. It is found that there is a significant positive correlation between R&D investment and IPO underpricing, indicating that the higher the R&D investment is, the higher the IPO underpricing degree is; the intervention of VC syndication plays a role of “adverse selection” instead of giving play to its advantages of sharing information, which intensifies the positive correlation between R&D investment and IPO underpricing. Further analysis shows that the reputation of the leading VC in syndication can play a negative regulating role; the higher the reputation of the leading VC is, the more it can play the “certification effect”, reduce the information asymmetry caused by R&D investment, therefore alleviating the IPO underpricing caused by R&D investment.

scholarly journals Making Waves: To Innovate or Be a Fast Second?

2016 ◽  
Vol 51 (2) ◽  
pp. 415-433 ◽  
Author(s):  
Chris Yung
Keyword(s):  
Venture Capital ◽  
Adverse Selection ◽  
Initial Public Offerings ◽  
Irreversible Investment ◽  
Public Offerings ◽  
Free Ride ◽  
Leaders And Followers

AbstractInternal finance leads to a stalemate in innovation games; each firm wants to free-ride on the others’ costly experimentation. When instead innovation is financed externally (e.g., with venture capital or initial public offerings), there is an endogenous cost to delay. Waiting to make risky irreversible investment conveys pessimistic information. I characterize the relative sizes of waves of leaders and followers in innovation cycles, and the endogenous, intertemporal distribution of quality as each wave builds and crashes. Finally, old waves leave an adverse selection “hangover,” such that too much early innovation can cause the market for future innovation to break down.

scholarly journals Government Financing of R&D: A Mechanism Design Approach

2021 ◽  
Vol 13 (3) ◽  
pp. 238-272
Author(s):  
Saul Lach ◽  
Zvika Neeman ◽  
Mark Schankerman
Keyword(s):  
Venture Capital ◽  
Adverse Selection ◽  
Optimal Policy ◽  
Welfare Gains ◽  
High Interest Rate ◽  
High Interest ◽  
Positive Externalities ◽  
Venture Capital Firms ◽  
Private Venture ◽  
The Cost

We study how to design an optimal government loan program for risky R&D projects with positive externalities. With adverse selection, the optimal government contract involves a high interest rate but nearly zero cofinancing by the entrepreneur. This contrasts sharply with observed loan schemes. With adverse selection and moral hazard, allowing for two levels of effort by the entrepreneur, the optimal policy consists of a menu of at most two contracts, one with high interest and zero self-financing and a second with a lower interest plus cofinancing. Calibrated simulations assess welfare gains from the optimal policy, observed loan programs, and a direct subsidy to private venture capital firms. The gains vary with the size of the externalities, the cost of public funds, and the effectiveness of the private venture capital industry. (JEL D82, D86, G24, L26, O31, G32, H81)

Sign in / Sign up

Export Citation Format

Share Document