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Venture capital financing, moral hazard, and learning
Open accessAbstract
We consider the provision of venture capital in a dynamic agency model. The value of the venture project is initially uncertain and more information arrives by developing the project. The allocation of the funds and the learning process are subject to moral hazard. The optimal contract is a time-varying share contract which provides intertemporal risk-sharing between venture capitalist and entrepreneur. The share of the entrepreneur reflects the value of a real option. The option itself is based on the control of the funds. The dynamic agency costs may be high and lead to an inefficient early stopping of the project. A positive liquidation value explains the adoption of strip financing or convertible securities. Finally, relationship financing, including monitoring and the occasional replacement of the management improves the efficiency of the financial contracting.
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“An agency problem arises in the relationship between the entrepreneur and the venture capitalist in which the entrepreneur may expend insucient eort, exhibit expense preference behavior, or lack sucient information or skill to make optimal production decisions.”
From The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle (1998) · cites this paper as Bergemann and Hege, 1998
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Research works printed but not linked: 16
- Admati, 1994, Robust financial contracting and the role of venture capitalists, Journal of Finance, 49, 371, 10.1111/j.1540-6261.1994.tb05146.x · DOI
- Amit, R., Brander, J., Zott, C., 1997. Why do venture capital firms exist? Theory and Canadian evidence. Working paper. University of British Columbia, Vancouver · DOI
- Berglöf, 1994, A control theory of venture capital finance, Journal of Law, Economics and Organization, 10, 247
- Chan, 1990, Learning, corporate control and performance requirements in venture capital contracts, International Economic Review, 31, 365, 10.2307/2526845 · DOI
- Cornelli, F., Yosha, O., 1997. Stage financing and the role of convertible debt. Working paper. London Business School · DOI
- Gompers, 1995, Optimal investment, monitoring, and the staging of venture capital, Journal of Finance, 50, 1461, 10.1111/j.1540-6261.1995.tb05185.x · DOI
- Gompers, 1996, The use of covenants: An empirical analysis of venture partnership agreements, Journal of Law and Economics, 39, 463, 10.1086/467356 · DOI
- Gorman, 1989, What do venture capitalists do?, Journal of Business Venturing, 4, 231, 10.1016/0883-9026(89)90014-1 · DOI · Paper page
- Hart, 1994, A theory of debt based on the inalienability of human capital, Quarterly Journal of Economics, 109, 841, 10.2307/2118350 · DOI
- Hellmann, T., 1998. The allocation of control rights in venture capital contracts. Rand Journal of Economics 29, 57–76 · DOI
- Jensen, 1976, Theory of the firm: Managerial behavior, agency costs and ownership structure, Journal of Financial Economics, 3, 305, 10.1016/0304-405X(76)90026-X · DOI · Paper page
- Lerner, 1994, Venture capitalists and the decision to go public, Journal of Financial Economics, 35, 293, 10.1016/0304-405X(94)90035-3 · DOI
- Lerner, 1995, Venture capitalists and the oversight of private firms, Journal of Finance, 50, 301, 10.1111/j.1540-6261.1995.tb05175.x · DOI
- Poterba, J.M., 1989. Venture capital and capital gains taxation. In: Summers, L.H. (Ed.), Tax Policy and the Economy, vol. 3. MIT Press, Cambridge, MA, pp. 47–67 · DOI
- Sahlman, 1990, The structure and governance of venture-capital organizations, Journal of Financial Economics, 27, 473, 10.1016/0304-405X(90)90065-8 · DOI · Paper page
- Trester, J.J., 1997. Venture capital contracting under asymmetric information. Journal of Banking and Finance 22, 675–699, this issue · DOI
Cited by
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N. Berger, A., & F. Udell, G. (1998) · Journal of Banking & Finance · doi:10.1016/s0378-4266(98)00038-7 · Cited by 3,690
“The problem may be compounded by the fact that information in general about the value of the project is imperfect and revealed over time (Cooper and Carleton 1979, Bergemann and Hege 1998).”
Metadata
- Authors
- Bergemann, D., & Hege, U.
- Affiliations
- Yale University (US)
- Tilburg University (NL)
- Corresponding author
- Bergemann, Dirk
- Venue
- Journal of Banking & Finance
- Publisher
- Elsevier BV
- Published
- 1998-08
- Volume
- 22
- Issue
- 6-8
- Pages
- 703-735
- ISSN
- 0378-4266 (ISSN-L)
- OpenAlex
- W2132742780
- Cited by
- 727
- References
- 0
- Citations by year
- 2026: 9 · 2025: 21 · 2024: 23 · 2023: 28 · 2022: 24 · 2021: 22 · 2020: 19 · 2019: 26 · 2018: 39 · 2017: 33 · 2016: 34 · 2015: 40 · 2014: 30 · 2013: 25 · 2012: 31
- FWCI
- 38.60
- Type
- journal article
- Language
- en
- Open access
- hybrid
- doi.org
- Licence
- Locations
- Journal of Banking & Finance (publishedVersion, cc-by-nc-nd)
- Research portal (Tilburg University) (submittedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- HAL (submittedVersion)
- Funders
- National Science Foundation (9709887)
- Yale University
- York University
- Universiteit van Tilburg
- Topics
- Social Sciences › Economics, Econometrics and Finance › Finance › Private Equity and Venture Capital
- Social Sciences › Economics, Econometrics and Finance › Finance › Capital Investment and Risk Analysis
- Social Sciences › Economics, Econometrics and Finance › Finance › Corporate Finance and Governance
- Keywords
- venture capital, moral hazard, learning, real options, agency costs, liquidation value, convertible securities, monitoring
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