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

Cristiano Bellavitis, Dzidziso Samuel Kamuriwo, Ulrich Hommel

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

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 preinvestment 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 postinvestment 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 while nurturing their relationships with entrepreneurs.

Original languageEnglish (US)
Pages (from-to)1328-1349
Number of pages22
JournalJournal of Small Business Management
Volume57
Issue number4
DOIs
StatePublished - Oct 1 2019
Externally publishedYes

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Strategy and Management
  • Management of Technology and Innovation

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