Moral hazard in high-risk environments: optimal follow-on investing in venture capital finance

This paper examines the joint effect of environmental risk and moral hazard on staging activity in venture capital financing. We show theoretically and empirically that venture capitalists face a trade-off between (a) deferring and staging investments to engage in learning of the risky venture and a...

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Bibliographic Details
Published in:Venture capital (London) 2018-10, Vol.20 (4), p.323-338
Main Authors: Tennert, Julius, Lambert, Marie, Burghof, Hans-Peter
Format: Article
Language:English
Subjects:
Agency Cost
Business & economic sciences
Compensation
Entrepreneurial finance
Entrepreneurs
Environmental aspects
Finance
Follow-on investments
High risk
Investments
Market Risk
Moral Hazard
Morality
Real Option
Risk factors
Sciences économiques & de gestion
Staging
Venture Capital
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Summary:This paper examines the joint effect of environmental risk and moral hazard on staging activity in venture capital financing. We show theoretically and empirically that venture capitalists face a trade-off between (a) deferring and staging investments to engage in learning of the risky venture and avoid downside losses and (b) committing additional funds to update the incentive of the entrepreneur. We describe this trade-off through the timing of follow-on investments and show that highly qualified entrepreneurs demand greater compensation (a larger share) than do less-qualified entrepreneurs in situations of high risk.
ISSN:1369-1066
1464-5343
1464-5343
DOI:10.1080/13691066.2018.1491095