Mitigating agency risk between investors and ventures’ managers

Abstract

The general management literature has long focused on the agency risks involved in the relationship between general managers and shareholders. Shareholders can deploy contractual and non-contractual mechanisms to reduce these inefficiencies. This study examines - based on a broad international sample of investment contracts - how the use of contractual and non-contractual mechanisms is related to the degree of risks associated with the venture’s development stage as well as how these practices differ across countries. Hypotheses are tested using a proprietary dataset of 265 hand-collected investment contracts associated with ventures in the U.S., Israel and nine European countries. Findings suggest that the use of mitigating contractual and non-contractual mechanisms is related to the degree of agency risks, and that these practices vary across countries. This study draws implications for how investors can best deploy their capital in different institutional settings whilst nurturing their relationships with managers and entrepreneurs