Venture Capital Contracting with Renegotiation

This paper examines contracting between a venture capitalist and an entrepreneur in a setting with unobservable effort when contracts are renegotiated each period. The contribution of our paper lies in the insights it provides on optimal contracts in this setting. The insights from our model prove to be significantly different in certain respects than those obtained under a multi-period contract without renegotiation or a single period setting. An example is worked out to illustrate the division of payoff between the venture capitalist and the entrepreneur each period.

Using historical annual reports in teaching: Letting the past benefit the present

In this article, it is suggested that accounting education may be enhanced by the use of published historical accounting materials, such as annual reports. Comparing such materials with modern reports serves to reinforce the notion that accounting evolves in response to environmental change. Further, requiring students to analytically derive cash flow statements from historical published annual reports provides several direct pedagogical benefits

The accounting art of war: Bounded rationality, earnings management and insider trading

The study uses the idea of a multi-faceted managerial strategy and examines the effects of bounded rationality and ethical compass on insider trading, earnings management, and managerial effort. The analysis establishes that bounded rationality and the ethical compass play an important role in the managers' decisions. As such, the study provides an insight into why managers would engage in schemes that could potentially ruin their lives. The analysis also demonstrates that earnings management has multi-period dynamic properties, while the effort and insider trading decisions are made independently each period. Another interesting finding is that that earnings manipulation can only occur in a world with ethically diverse managers. Contrary to common wisdom, the study shows that shareholders have a vested interest in eliciting income management because it boosts their wealth. Consequently, expected market losses to shareholders' value, in response to detected accounting manipulations, are necessary to mitigate shareholders' preferences for earnings management. It is interesting to note that shareholders' preferences for earnings management (balanced by the expected market losses) imply that they would not necessarily prefer to hire the most ethical and least 'bounded rationality' decision-making managers. Finally, the study examines the public policy implications of the topic in light of the recent US Senate Financial Regulation Overhaul bill.

Selection of entrepreneurs in the venture capital industry: An asymptotic analysis

We study a model of entrepreneurs who compete in an auction-like setting for venture capital (VC) funding in a setting where limited capital dictates that the VC can only finance the best entrepreneurs. With asymmetric information, VCs can only assess entrepreneurs by the progress of development, which, in equilibrium, reveals the quality of the new technology. Using an asymptotic analysis, we prove that in attractive industries having a large number of entrepreneurs competing for VC funding could lead to underinvestment in technology by entrepreneurs as the effort exerted by losing entrepreneurs is wasted. The study then proceeds to characterize the conditions under which a greater number of competing entrepreneurs is better. The model also demonstrates that VCs could possibly increase their payoff by concentrating on a single industry. In addition, the study also provides some insights on the effects of multiple investments by VCs and the effects of competition among VCs on the same investments.Asymptotic methods Auctions Contests Entrepreneurs Venture capital