Adverse Selection and Capital Structure: Evidence from Venture Capital

2001 ◽  
Author(s):  
Douglas J. Cumming
Keyword(s):  
Venture Capital ◽  
Capital Structure ◽  
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

scholarly journals EQUITY RECYCLING VS FINANCIAL CONSTRAINTS

2014 ◽  
pp. 76-82
Author(s):  
S. I. Lutsenko
Keyword(s):  
Capital Structure ◽  
Information Asymmetry ◽  
Adverse Selection ◽  
Financial Constraints ◽  
Random Effect ◽  
Point Of View ◽  
Financial Policy ◽  
Process Of Change ◽  
Major Factors ◽  
The Given

The influence of major factors on financial policy of the Russian companies is considered. The author researches process of change of an equity (recycling) in the conditions of financial con-straints. The given work tries to give the answer to a question - whether there is a redistribution of an equity in the company. The models considered in work are tested for a subject of a choice of the most adequate, from the point of view, forecasting. For each of models three kinds of specifications are estimated: pooled regression, regression with a random effect and regression with the fixed ef-fect. Task of the presented work is penetration into an essence of financial policy of the Russian companies: whether there is a dividend payout of shareholders in process an equity recycling or the received incomes go on development the companies (reinvesting). Novelty of the presented work consists in consideration an equity recycling as mechanism with which help the Russian companies direct the income of an equity on its shares repurchase and accumulations of profit for the reinvesting. Equity recycling gives the chance to reserve the companies certain level of a debt for the further use as a financing sources. Besides, influence of other sources of financing is considered in the conditions of financial constraints. The Russian companies resolve a problem of adverse selection (a choice of the cheapest sources of financing — profit). The author notices that low information asymmetry allows the companies to choose cheaper sources of financing. The mechanism an equity recycling gives the chance to the companies to regulate the debt level, actively correcting capital structure.

The Pecking Order Theory of Capital Structure

2020 ◽  
Author(s):  
Murray Z. Frank ◽  
Vidhan Goyal ◽  
Tao Shen
Keyword(s):  
Capital Structure ◽  
Adverse Selection ◽  
Small Firms ◽  
Order Theory ◽  
Selection Problem ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Internal Resources ◽  
Debt Capacity ◽  
Adverse Selection Problem

The pecking order theory of corporate capital structure developed by states that issuing securities is subject to an adverse selection problem. Managers endowed with private information have incentives to issue overpriced risky securities. But they also understand that issuing such securities will result in a negative price reaction because rational investors, who are at an information disadvantage, will discount the prices of any risky securities the firm issues. Consequently, firms follow a pecking order: use internal resources when possible; if internal funds are inadequate, obtain external debt; external equity is the last resort. Large firms rely significantly on internal finance to meet their needs. External net debt issues finance the minor deficits that remain. Equity is not a significant source of financing for large firms. By contrast, small firms lack sufficient internal resources and obtain external finance. Although much of it is equity, there are substantial issues of debt by small firms. Firms are sorted into three portfolios based on whether they have a surplus or a deficit. About 15% of firm-year observations are in the surplus group. Firms primarily use surpluses to pay down debt. About 56% of firm-year observations are in the balance group. These firms generate internal cash flows that are just about enough to meet their investment and dividend needs. They issue debt, which is just enough to meet their debt repayments. They are relatively inactive in equity markets. About 29% of firm-year observations are in the deficit group. Deficits arise because of a combination of negative profitability and significant investments in both real and financial assets. Some financing patterns in the data are consistent with a pecking order: firms with moderate deficits favor debt issues; firms with very high deficits rely much more on equity than debt. Others are not: many equity-issuing firms do not seem to have entirely used up the debt capacity; some with a surplus issue equity. The theory suggests a sharp discontinuity in financing methods between surplus firms and deficit firms, and another at debt capacity. The literature provides little support for the predicted threshold effects. The theoretical work has shown that adverse selection does not necessarily lead to pecking order behavior. The pecking order is obtained only under special conditions. With both risky debt and equity being issued, there is often scope for many equilibria, and there is no clear basis for selecting among them. A pecking order may or may not emerge from the theory. Several articles show that the adverse selection problem can be solved by certain financing strategies or properly designed managerial contracts and can even disappear in dynamic models. Although adverse selection can generate a pecking order, it can also be caused by agency considerations, transaction costs, tax consideration, or behavioral decision-making considerations. Under standard tests in the literature, these alternative underlying motivations are commonly observationally equivalent.

Graceful Exits and Missed Opportunities: Xerox's Management of its Technology Spin-off Organizations

2002 ◽  
Vol 76 (4) ◽  
pp. 803-837 ◽  
Author(s):  
Henry Chesbrough
Keyword(s):  
Venture Capital ◽  
Capital Structure ◽  
Ad Hoc ◽  
Corporate Strategy ◽  
Research Centers ◽  
Missed Opportunities ◽  
The Future ◽  
Capital Financing ◽  
The Common ◽  
Common Perception

The Xerox Corporation has devised several strategies for managing the numerous spin-off firms that independently commercialized many of its technologies. From 1979 to 1998, thirty-five technology-based organizations emerged from Xerox's research centers. Contradicting the common perception that Xerox “fumbled the future” by letting its technology walk out the door, in fact the company set in motion a series of deliberate initiatives to manage its spin-off organizations. After initially adopting a laissez-faire approach, the company soon turned to ad hoc methods, which evolved into a formal internal venture capital structure and culminated in a triage process, with the result that only companies perceived by Xerox as fitting into its overall corporate strategy were retained. By using spin-offs to withdraw gracefully from areas it considered to be marginal, Xerox for feited the potential to realize value from their research. Some, but not all, of the spin-offs obtained venture capital financing from outside sources and thus prospered independently. Their success demonstrated the opportunity that Xerox missed in managing its spin-offs.

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