Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
1019833 | Journal of Business Venturing | 2007 | 25 Pages |
Abstract
This paper examines the entrepreneur's choice between bank finance and venture capital. With bank finance, the entrepreneur keeps full control of the firm and has efficient incentives to exert effort. With venture capital finance, there is a two-sided moral hazard problem as both the entrepreneur and venture capitalist (VC) provide unverifiable effort. The entrepreneur benefits from the VC's managerial input but must surrender partial ownership of the venture, thus diluting the entrepreneur's incentive to provide effort. Venture capital tends to be preferred to bank finance when VC productivity is high and entrepreneurial productivity is low.
Related Topics
Social Sciences and Humanities
Business, Management and Accounting
Business and International Management
Authors
Jean-Etienne de Bettignies, James A. Brander,