Mitigation of Moral Hazard and Adverse Selection in Venture Capital Financing: The Influence of the Country’s Institutional Setting

A venture capitalist (VC) needs to trade off benefits and costs when attempting to mitigate agency problems in their investor-investee relationship. We argue that signals of ventures complement the VC’s capacity to screen and conduct a due diligence during the pre-investment phase, but its attractiveness may diminish in institutional settings supporting greater transparency. Similarly, whereas a VC may opt for contractual covenants to curb potential opportunism by ventures in the post-investment phase, this may only be effective in settings supportive of shareholder rights enforcement. Using an international sample of VC contracts, our study finds broad support for these conjectures. It delineates theoretical and practical implications for how investors can best deploy their capital in different institutional settings whilst nurturing their relationships with entrepreneurs

Skill Variety, Innovation and New Business Formation

We extend Lazear's theory of skills variety and entrepreneurship in three directions. First, we provide a theoretical framework linking new business creation with an entrepreneur's skill variety. Second, in this model we allow for both generalists and specialists to possess skill variety. Third, we test our model empirically using data from Germany and the Netherlands. Individuals with more varied work experience seems indeed more likely to successfully start up a new business and that being a generalist does not seem to be important in this regard. Finally, we find that innovation positively moderates the relationship between having varied experiences, and being successful in starting up a new business. Our conclusion is that entrepreneurs with more varied work experience are more likely to introduce innovations that have not only technical, but also commercial value. Our findings support the notion that entrepreneurship can be learned

The role of venture capitalists in the regional innovation ecosystem : a comparison of networking patterns between private and publicly backed venture capital funds

This paper empirically examines the development of social networks among venture capitalists and other professionals of the regional innovation ecosystem. Using an online survey of venture capitalists, the article considers their networking behaviour, focusing particularly on the distinction between those employed by private and those employed by publicly backed venture capital funds, and on the composition and spatial search of their networks. It investigates whether the frequency of interaction between venture capitalists and other members of the innovation ecosystem is associated with the nature of the venture capital funds. The paper provides the first detailed investigation of the relationship between different types of venture capitalists and other players of the innovation ecosystem such as universities incubators, research institutes, and business support organisations. The results show that there are distinctive differences within the two seemingly similar professional groups (private and public venture capitalists), and public dependence of the venture capital fund is strongly and significantly associated with higher volumes of interactions. The more publicly dependent a fund is, the more it interacts with other players of the innovation system. This finding has important implications for both academics and practitioners and suggests that publicly backed funds have a wider role to play in mobilising the different players of the regional innovation ecosystem

The Impact of Profit Taxation on Capitalized Investment with Options to Delay and Divest

In entrepreneurial decisions making uncertain future profits often are a main characteristics of real investment opportunities. If investors can react to uncertainty the degree of irreversibility and timing flexibility inherent in the available project should be integrated into the decision calculus. In this paper we investigate the interdependencies of effects from profit taxation and real options. We model an investment decision including an option to invest and an option to abandon. We show that increasing the tax rate can lead to paradoxical tax effects, i.e. may foster an investor's willingness to invest into a capitalized investment. Instead, if we abstract from the possibility to abandon the investment object such paradoxical effect cannot be identified. Determining the after-tax value of the option to enter the investment project with and without an abandonment option we receive a critical cash flow cutoff level. We find that the value of the option to abandon depends on the tax rate and the amount of periodical cash flows. The option value can be increasing or decreasing in the tax rate. We find scenarios with paradoxical tax effects and show that the observed paradoxical effects are due to the presence of the real abandonment option itself. This finding contributes to the stream of literature that explains potential sources of paradoxical tax effects. The generated decision rules are helpful for investors facing risky investment opportunities and for discussing the economic impact of tax reforms. Furthermore, we highlight the overwhelming importance of integrating taxes in typically applied valuation approaches

Tax Neutrality: Illusion or Reality? The Case of Entrepreneurship (con V. Kanniainen), CESifo Working Paper Series No. 2306.

CESifo Working Paper No. 230