scholarly journals Replacing Management or Not: Contract Renegotiation to Prevent Double Moral Hazards of Venture Capital Investments

2021 ◽  
Vol 2021 ◽  
pp. 1-10
Author(s):  
Linsen Yin ◽  
Ane Pan
Keyword(s):  
Venture Capital ◽  
Strategic Behavior ◽  
Status Quo ◽  
Work Team ◽  
Venture Capitalist ◽  
Private Benefits ◽  
The Status ◽  
Venture Enterprise ◽  
Behavior Choice ◽  
Management Work

During the venture capital development, replacing the management work team or keeping up the status quo is a key strategy choice for venture capitalist and venture entrepreneur about the long-term development of enterprise and the control right transferring. In fact, the contract designing focuses on the distribution of cash flow to encourage both efforts in order to avoid double moral hazard, and the strategy behavior has similar effects according to the developing condition of venture enterprise. In this paper, we consider both contract design and strategic behavior, regarding this strategic behavior choice as a motivator and combining strategic behavior with financial instrument options. The main innovation is to redesign and optimize the contract based on dynamic perspective, which will analyze initial contract designed to motivate both sides’ effort if a venture enterprise is in good state, and then renegotiate whether to replace the management work team or keep up the status quo according to the venture enterprise’s development state in the process of venture investment cooperation. The paper also puts forward some conclusions: joint effort of both sides can be motivated through strategic behavior choice and then lead to increasing the overall value of the venture enterprise; after the venture enterprise has gained private benefits in the early stage, the venture capitalist needs to make appropriate assignments and demisability in benefits to remotivate the venture enterprise’s efforts, aiming to further balance venture enterprise’s private benefits and the earnings redistributed by venture capitalist.

scholarly journals Venture Capital Contracting with Double-Sided Moral Hazard and Fairness Concerns

2018 ◽  
Vol 2018 ◽  
pp. 1-13 ◽  
Author(s):  
Jiajia Chang ◽  
Zhijun Hu
Keyword(s):  
Venture Capital ◽  
Moral Hazard ◽  
Maximization Problem ◽  
Venture Capitalist ◽  
Venture Capitalists ◽  
Constant Elasticity ◽  
Constant Elasticity Of Substitution ◽  
Effort Level ◽  
Fairness Concerns ◽  
Venture Enterprise

The development of new venture enterprise is the result of joint efforts of entrepreneurs and venture capitalists who collaborate based on complementary resources. In this paper, we analyze a venture capital incentive contracting model in which a venture capitalist interacts with an entrepreneur who is risk neutral and fairness concerned, offering him an equity contract. We solve the venture capitalist’s maximization problem in the presence of double-sided moral hazard. Our results show that fairness concerns change the structure of the optimal contract. More importantly, we show that the solution to the contract regarding the optimal share given to the entrepreneur is nonlinear and is a fixed point between 0 and 1. Further, we simulate the model under the assumption that venture project’s revenue is a Constant Elasticity of Substitution (CES) function and obtain the following results. (1) When the two efforts are complementary, the venture capitalist’s effort does not monotonically decrease in the share allocated to the entrepreneur, while the entrepreneur’s effort does not monotonically increase in his share. (2) Relative to the benchmark case where the entrepreneur is fairness neutral, the optimal equity share allocated to the fair-minded entrepreneur is larger than 1/2, and as the degree of efforts complementarity increases, the optimal equity share tends to 60%. In this scenario, for a given efforts substitution parameter, the fair-minded entrepreneur provides a higher effort level than the venture capitalist.

The status quo and the investment decisions

2020 ◽  
Vol 46 (9) ◽  
pp. 1183-1197
Author(s):  
Sana EL Harbi ◽  
Oumeima Toumia
Keyword(s):  
Venture Capital ◽  
Status Quo ◽  
Added Value ◽  
Capital Investments ◽  
Institutional Factor ◽  
Content Type ◽  
Business Plans ◽  
The Status ◽  
Venture Capital Investments ◽  
Practical Implications

PurposeThis article investigates the influence of status quo bias (SQB) on venture capital investments.Design/methodology/approachThe authors use the dynamic panel probit (respectively logit) model for 24 countries over nine years (from 2007–2015).FindingsThe authors’ regressions reveal that the SQB is meaningful in real decisions. Indeed, the authors find that the choice of investment sectors depends positively on the previous choice. Moreover, the study identifies other factors that were perceived to influence the choice of the investment industry such as added value by activity and the venture capital (VC) country attractiveness index.Practical implicationsBy knowing the behavior of VC FIRMS, entrepreneurs would better frame their business plans and better target the VC to whom they should better contact.Originality/valueNo research has dealt with this question, yet status quo is consensually recognized as an omnipresent institutional factor.

Factional Conflict at Beijing University, 1966–1968

2006 ◽  
Vol 188 ◽  
pp. 1023-1047 ◽  
Author(s):  
Andrew G. Walder
Keyword(s):  
Status Quo ◽  
Work Team ◽  
Party Committee ◽  
The Status

For two years after the summer of 1966, Beijing University was racked by factional conflict and escalating violence. Despite the intensity of the struggle the factions did not express didfferences in political doctrine or orientation towards the status quo. Nie Yuanzi, the veteran Party cadre who advanced rapidly in the municipal hierarchy after denouncing both the old Beida Party Committee and the work team, fiercely defended her growing power against opponents led by several former allies. Compromise proved impossible as mutual accusations intensified, and interventions by national politicians served only to entrench the divisions. The conflicts were bitter and personal not because they expressed differences between status groups, but because the rivals knew one another so well, had so much in common, and because the consequences of losing in this struggle were so dire.

NoSCE or Next Generation osce?

2016 ◽  
Vol 27 (3-4) ◽  
pp. 289-314
Author(s):  
Oleg Shakirov
Keyword(s):  
Conflict Management ◽  
Status Quo ◽  
Next Generation ◽  
The West ◽  
The Status ◽  
Ukraine Crisis ◽  
Near Future ◽  
Management Work

This article examines how increased tensions between Russia and the West in the wake of the Ukraine crisis impact the conflict management work of the osce. It first looks at Russian perspectives of the osce and focuses on how these changed in the post-2014 period. It then proceeds with an overview of implications resulting from geopolitical tensions between Russia and the West that could positively or negatively affect the role of the osce in conflict management in the long term. The article ends by laying out 4 scenarios on how the situation and the osce could evolve and argues that in the near future a continuation of the status quo is most probable.

scholarly journals A Soft Budget Constraint Explanation for the Venture Capital Cycle

2009 ◽  
Vol 10 (1) ◽  
pp. 71-90 ◽  
Author(s):  
Georg Gebhardt
Keyword(s):  
Venture Capital ◽  
Agency Problems ◽  
Probability Of Failure ◽  
Budget Constraint ◽  
New Venture ◽  
Venture Capitalist ◽  
Soft Budget Constraint ◽  
Private Benefits ◽  
Ex Ante ◽  
Constraint Problem

Abstract We explore why venture capital funds limit the amount of capital they raise and do not reinvest the proceeds. This structure is puzzling because it leads to a succession of several funds financing each new venture, which multiplies the well-known agency problems. We argue that an inside investor cannot provide a hard budget constraint while a less informed outsider can. Therefore, the venture capitalist delegates the continuation decision to the outsider by ex ante restricting the amount of capital he has under management. The soft budget constraint problem becomes the more important the higher the entrepreneur’s private benefits are and the higher the probability of failure of a project is.

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