Venture Capital Contracts with Moral Hazard and Adverse Selection

• Main Authors: Gu-shin Tung, 童桂馨
• Other Authors: none
• Format: Others
• Language: zh-TW
• Published: 2004
• Online Access: http://ndltd.ncl.edu.tw/handle/59695143969097026165

博士 === 國立中山大學 === 企業管理學系研究所 === 92 === Venture Capital Contracts with Moral Hazard and Adverse Selection Abstract This study offers a discussion on the agency theory of venture capital, including the cases of one venture capitalist and one entrepreneur, one venture capitalist and two entrepreneurs, and two venture capitalists and one entrepreneur. The first model compares the effort levels of the two parties, one venture capitalist and one entrepreneur, when there is a double moral hazard problem. The results are as follows:(1)the effort levels under double moral hazard are lower than those under full information，no matter if the contract is common stock or convertible debt ; (2) a suitably chosen convertible debt contract outperforms a common stock contract; and (3) in the equilibrium, the venture capitalist’s net compensation is equal to his cost of capital. Secondly, the study extends to a double side moral hazard problem between one venture capitalist and two entrepreneurs. The results show: (1) the effort levels under double moral hazard are still lower than those under full information in the model; (2) one venture capitalist and two entrepreneurs will come up with a double moral hazard problem if they sign the common stock contract; and (3) the incentive to lessen the double moral hazard problem is the total profit shared conditionally by one venture capitalist and two entrepreneurs. Finally, this study develops a joint investment framework with an adverse selection problem. One entrepreneur is informed about the project’s potential profitability but two venture capitalists are not .The results show:(1)if the entrepreneur reveals his private information, the individual management cost of two venture capitalists will be equal; (2)if the entrepreneur does not reveal his private information, the individual management cost of the two venture capitalists will be higher in an uncooperative situation; and (3)if the entrepreneur does not reveal his private information, the venture capitalists’ effort levels will be higher in case their management knowledge is of substitutive nature than that of complementary nature. Key words：venture capital, moral hazard, adverse selection