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

Bellavitis, C., Hommel, U. and Kamuriwo, D. S. (2018). Mitigation of Moral Hazard and Adverse Selection in Venture Capital Financing: The Influence of the Country’s Institutional Setting. Journal of Small Business Management,

Abstract

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.

Publication Type: Article
Additional Information: This is the peer reviewed version of the following article: Kamuriwo, D. S., Bellavitis, C. & Hommel, U. (2017). Mitigation of Moral Hazard and Adverse Selection in Venture Capital Financing: The Influence of the Country’s Institutional Setting. Journal of Small Business Management, which has been published in final form at: http://onlinelibrary.wiley.com/journal/10.1111/jsbm.12391. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Management
URI: http://openaccess.city.ac.uk/id/eprint/17660
[img] Text - Accepted Version
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