Opaque Costly Signals and Debt Contracts in Entrepreneurial Ventures

SYNOPSIS Proposed changes by the FASB and the IASB to lease accounting standards will substantially change the accounting for operating leases by requiring the capitalization of future lease payments. We consider the impact of these changes on firms' debt covenants by examining the frequency of income-statement- versus balance-sheet-based accounting ratios in debt covenants of firms in high and low Off Balance Sheet (OBS) lease industries. Based on debt contracts from the 1996–2009 period, our results provide evidence that lenders focus on balance sheet (income statement) ratios in designing debt covenants for borrowers in low (high) OBS lease industries. Further, the use of balance-sheet- (income-statement-) based covenants falls (rises) faster in high OBS lease industries than in low OBS lease industries as the use of OBS leasing increases. This evidence indicates that OBS operating leases influence lenders' use of accounting information in covenants, suggesting that creditors consider the impact of OBS leases when structuring debt agreements. These results also suggest that the proposed capitalization of OBS leases may not result in firms violating loan covenants but will make the balance sheet a more complete source of information for debt contracting by removing the need for constructive capitalization of OBS leases.

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Collaboration Among Silicon Valley Venture Capitalists

The Oxford Handbook of Entrepreneurship and Collaboration ◽

10.1093/oxfordhb/9780190633899.013.38 ◽

2019 ◽

pp. 200-219

Author(s):

Lyda Bigelow ◽

Jennifer Kuan ◽

Kyle Mayer

Keyword(s):

Venture Capital ◽

Regulatory Focus ◽

Regional Differences ◽

Silicon Valley ◽

Psychological Effects ◽

Venture Capitalists ◽

Regulatory Focus Theory ◽

Industry Clusters ◽

Entrepreneurial Ventures ◽

Point Of Entry

Regional differences among industry clusters have long been a puzzle, especially when performance differences are significant. This chapter examines the case of venture capital investing, in which Silicon Valley differs from the rest of the world despite attempts to imitate its model. The point of entry in this chapter is the contract between venture capitalist and entrepreneur. Although such contracts have been analyzed in other research, this chapter argues that the psychological effects of different contract styles are of primary importance to innovative outcomes of entrepreneurial ventures. Thus, it argues that regulatory focus theory, which considers the psychological effects of contracting, is essential to understanding differences in practice and outcomes in venture capital clusters.

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