repeated moral hazard and contracts with memory the case of risk neutrality we consider a repeated moral hazard problem where both the principal and the wealth constrained agent are risk neutral in each of two periods the agent can exert unobservable effort leading to success or failure incentives provided in the second period act as carrot and stick for the first period so that the effort level induced in the second period is higher after a first period success than after a failure if renegotiation cannot be prevented the principal may prefer a project with lower returns i e a project may be too good to be financed or similarly an agent can be overqualified this article offers a new perspective on dynamic moral hazard problems consider a riskneutral principal who can hire a risk neutral but wealth constrained agent the agent can exert unobservable effort which increases the likelihood of success in the one shot problem there is a well known trade off between effort incentives and rent extraction which leads to a downward distorted effort level compared to the first best solution we extend the standard model by assuming that there is a second period in which the principal can make an investment to continue the project and the agent can again exert unobservable effort it turns out that there are several interesting insights that so far have escaped the literature on repeated moral hazard which was focused on the case of risk averse agents in particular if the principal can commit not to renegotiate the second period incentives can be used to partially circumvent the limited liability constraint in the second period the principal induces the agent to choose a particularly high effort level following a first period success and a particularly low effort level following a first period failure the prospect of a higher second period rent following a first period success motivates the agent to exert more effort in the first period i e rents in the second period act as reward and punishment for the first period it should be emphasized that we assume no technological impact of a first period success or failure on the second period technology nevertheless an optimal dynamic contract exhibits memory hence if an outsider observed today a principal agent pair that was successful and another identical pair that was not successful he would be right to predict that the first pair also is more likely to succeed tomorrow in other words a serial correlation across periods which we sometimes refer to as a hot hand effect is generated endogenously merely based on incentive considerations 2

standard risk aversion this paper introduces the concept of standard risk aversion a von neumann morgenstern utility function has standard risk aversion if any risk makes a small reduction in wealth more painful in the sense of an increased reduction in expected utility also makes any undesirable independent risk more painful it is shown that given monotonicity and concavity the combination of decreasing absolute risk aversion and decreasing absolute prudence is necessary and sufficient for standard risk aversion standard risk aversion is shown to imply not only pratt and zeckhauser s proper risk aversion individually undesirable independent risks always being jointly undesirable but also that being forced to face an undesirable risk reduces the optimal investment in a risky security with and independent return similar results are established for the effect of broad class of increases in one risk on the desirability of or optimal investment in a second independent risk

cross border venture capital investments the impact of foreignness on returns against the background of the growing internationalization of venture capital vc investing this is the first global comparison of the returns generated by individual domestic and cross border deals we examine investments worldwide during 1971 2009 and find that cross border investments significantly underperform compared with equivalent domestic investments returns are negatively affected by geographic distances cultural disparities and institutional differences between the home and host countries returns on cross border and domestic deals also decline after the late 1990s international portfolio diversification and the saturation of domestic markets may explain why vc investors make cross border investments despite poor expected returns

limited attention and the role of the venture capitalist abstract this research analyzes the venture capitalist s incentives to maximize the profits of the entrepreneurs of ventures and the limited partners of a venture fund venture capital is a professionally managed pool of capital invested in equity linked private ventures entrepreneurs turn to venture capitalists for financing because high technology startup firms have low or negative cash flows which prevent them from borrowing or issuing equity in addition venture capitalists are actively involved in management of the venture to assure its success this solves the problem of startup firms that do not have the cash flows to hire management consultants venture capital contracts have three main characteristics 1 staging the commitment of capital and preserving the option to abandon 2 using compensation systems directly linked to value creation and 3 preserving ways to force management to distribute investment proceeds these characteristics address three fundamental problems 1 sorting the venture capital among the entrepreneurial ventures 2 providing incentives to motivate venture capitalists to maximize the value of the funded ventures and 3 providing incentives to motivate entrepreneurs to maximize the value of the ventures venture capitalists fund only about a dozen projects a year out of a thousand evaluated each project may receive several rounds of financing payoffs to vcs can be very high or be a complete loss the typical venture capital vc firm is organized as a limited partnership with the venture capitalists serving as general partners and the investors as limited partners general partner vcs act as agents for the limited partners in investing their funds vcs invest their human capital by placing their reputation on the line the goal is to begin to convert the investment into cash or marketable securities which are distributed to the partners vc management companies receive a management fee equal to a percentage usually 2 5 of the capital of each fund they also receive a percentage 15 30 of the profits of each fund called carried interest periodic reports are made by the vc firm to the limited partners usually these are only costs of managing the fund and so revenues are negative most contracts specify the percentage of time that the vc will devote to managing the fund the analysis of this research deals with the incentives of the vc who has limited attention to be allocated between improving current ventures and evaluating new ventures for possible funding the analysis shows that the vc as agent for both the entrepreneur and the general partners does not have the incentives required to maximize their profits the vc allocates attention among ventures and venture funds less frequently than required to maximize the entrepreneurs and limited partners profits however the vc does maximize the total profits of all ventures because the vc considers the opportunity cost of attention the vc s allocation of attention is efficient the implication of this result is that although the entrepreneurs and limited partners could be made better off with a different allocation of the vc s time this would be an inefficient use of the vc s time

regional institutional development political connections and entrepreneurial performance in china s transition economy while previous research emphasizes the role of political connections in facilitating entrepreneurial performance during china s early reform period 1978 1999 this study argues that regional institutions were increasingly conducive to entrepreneurial activities and thus also played a key role in china s entrepreneurial success during that period the purpose of this study is twofold first it aims to demonstrate how regional institutional development facilitated entrepreneurial performance in china second it aims to understand how formal institutional development among chinese regions affected the role of political connections using a two level hierarchical dataset on chinese private enterprises this study finds that not only legal protection of property rights but also the development of market systems mattered for entrepreneurial performance in addition it shows that political connections played a diminishing role during regional institutional development in china

currency hedging with options and futures abstract this paper examines the optimal hedging decision of a competitive exporting firm which faces concurrently hedgeable exchange rate risk and non hedgeable price risk we show that the hedging role of currency options is due to two distinct sources of non linearity i the multiplicative nature of the price and exchange rate risk and ii the marginal utility function of the firm in particular we show that a long put option position is optimal when the price risk is negatively correlated with the exchange rate risk and or the firm is prudent

hedging and competition abstract we consider firms that all else equal wish to minimize variability in their internal capital due to convex costs of raising external funds the firms can hedge the cash flow risk of the project but not that of winning or losing the auction we characterize optimal hedging and bidding strategies in this competition framework we show that access to financial markets makes firms bid more aggressively possibly even above their valuation for the project in addition hedging increases the variance of bids and makes firm values more dispersed further with hedging the covariance of internal capital changes with the risk factor is negative and is more negative the higher the correlation of the hedging instrument with the risk factor

social capital access and entrepreneurship we investigate the effect of social capital access on entrepreneurship social capital helps entrepreneurs to overcome resource constraints this is especially important in small communities where we often see a lack of market oriented institutions such as venture capital firms entrepreneurs gain access to social capital via club memberships combining differences in the number of individual club memberships with differences in the importance of social capital across communities we identify a causal small community mark up effect of individual club memberships on entrepreneurship assuming that unobserved heterogeneity that might influence both the individual s selection into clubs and the occupational choice to be an entrepreneur is independent of community size we find that the effect of club membership on the propensity to be an entrepreneur is 2 6 percentage points larger in small communities than in large communities robustness tests support the validity of our identifying assumption and results

new technology based firms in europe market penetration public venture capital and timing of investment we investigate the effect of public puvc and private prvc venture capital funds on the sales growth of 6513 european new technology based firms ntbfs during the period from 1992 to 2009 our results show that puvc backed ntbfs underperform with respect to prvc backed ones and do not grow more than non venture capital backed companies the impact of puvc is still not statistically significant even though it is positive when puvc funds target young ntbfs the only notable exception suggesting a positive and statistically significant impact for puvcs is when puvc funds cofinance with prvc funds and both target young firms

venture capital growing pains should the market diet abstract this paper examines recent trends in the venture capital market and current research that explores the impact of these trends high returns in the venture capital industry caused by the surging market for venture backed initial public offerings and recent reductions in the capital gains tax rate have led to dramatic increases in venture capital commitments this rise in fundraising has had dramatic effects on various segments of the venture capital market which may indicate overheating the terms and conditions of venture capital limited partnerships have changed reflecting the growth in demand for venture capital services the share of profits retained by venture capitalists has increased while the restrictiveness of the partnership agreements has eased venture firms are raising substantially larger funds with increasing pressure to find investments thereby moving to later stage investments the price of investments has also responded to the growing desire to increase investment finally institutional investors are increasingly looking internationally for new investment opportunities in venture capital to avoid potential market excesses

spatial collocation and venture capital in the us biotechnology industry biotechnology firms operate in a high risk and high reward environment and are in a constant race to secure venture capital vc funds previous contributions to the literature show that the vc firms tend to invest locally in order to monitor their investments and to provide operating assistance to their target firms further biotechnology is a knowledge based industry that tends to exhibit spatial clusters and the firms in such industries may collocate to benefit from gaining access to local markets for specialized inputs e g skilled researchers and from local knowledge spillovers and network externalities if such gains exist we expect that the collocated firms should exhibit positively correlated performance including in their ability to attract venture capital funds the purpose of this paper is to empirically measure the strength and spatial extent of the relationships among the amount of funds raised by proximate biotechnology firms we model these relationships with a spatial autoregression sar model and we control for characteristics of the biotechnology firms and the vc firms that provide their funds as well as site specific factors based on our fitted sar model we find that the amount of venture capital raised by a particular biotechnology firm is significantly influenced by the number of vc firms and the vc funding levels raised by biotechnology firms located within a 10 mile radius but these relationships are not statistically significant beyond this range

venture capital financing moral hazard and learning we consider the provision of venture capital in a dynamic agency model the value of the venture project is initially uncertain and more information arrives by developing the project the allocation of the funds and the learning process are subject to moral hazard the optimal contract is a time varying share contract which provides intertemporal risk sharing between venture capitalist and entrepreneur the share of the entrepreneur reflects the value of a real option the option itself is based on the control of the funds the dynamic agency costs may be high and lead to an inefficient early stopping of the project a positive liquidation value explains the adoption of strip financing or convertible securities finally relationship financing including monitoring and the occasional replacement of the management improves the efficiency of the financial contracting

institutional differences and the development of entrepreneurial ventures a comparison of the venture capital industries in latin america and asia this paper examines how differences in distinct institutional clusters of countries impact on the vital entrepreneurial activity of venture capital and how individuals organizations and their collective action in turn shape those institutions the focus on venture capital offers researchers the opportunity to view an industry that comes from a common root with strong and consistent traditions in which to examine how the differing institutional settings impact on behaviors in different markets and how the institutions themselves may change in these settings we also focus on emerging economies since such economies offer a natural laboratory to study the impact of institutional change specifically this paper employs an institutional theory perspective to examine venture capital in two regions of the world that form institutional clusters of countries latin america and asia it is found that the venture capital industry exhibits a strong consistency across many dimensions yet institutions in these two distinct settings result in significant differences in industry practice therefore this research is able to contribute to both empirical and theoretical understanding of emerging economies institutions in those environments and venture capital

anniversary article the strategy field from the perspective of management science divergent strands and possible integration we reflect on the evolution of the strategy field as seen through the window ofmanagement science reflecting the diverse disciplinary roots of strategy research we identify a broad ranging body of work that varies with respect to the assumptions made regarding individual rationality and the level of analysis at which the research is carried out we argue that recent developments begin to delineate a potentially unifying conceptual framework for treating the field s defining questions the conceptual apparatus of evolutionary economics we conclude by laying out important challenges for evolutionary economics if it is to serve as a foundation for both the positive and the normative research agendas of the strategy field

exporting firm and forward markets the multiperiod case abstract we consider a model with a competitive risk averse exporting firm who faces uncertain exchanges rates in a multiperiod analysis the capital stock or fixed input has to be determined at the outset while the variable input labor is chosen optimally at the beginning of each period but before the realization of the exchange rate we show that introducing unbiased currency forward markets decreases the capital labor ratio in all periods we also show that such a firm tends to overhedge compared to the one period cases in some cases the introduction of unbiased forward markets results in higher investments and production in all dates

presidential address innovation in retrospect and prospect this paper asks whether innovation has slowed in recent decades while there has been dramatic progress in information and communications technology the recent record of innovation in the crucially important agriculture energy transportation and health care sectors is cause for concern the paper also considers whether the pace of innovation is sufficient to improve or even maintain living standards in the face of still rapidly growing population global warming and other challenges i review the major market failures that lead to under provision of innovation and question whether current innovation policy particularly patent policy is effective in promoting innovation ce memoire se demande si l innovation a ralenti au cours des dernieres decennies alors qu il y a eu progres dramatique dans les technologies de l information et des communications le dossier des innovations recentes dans des secteurs aussi importants que l agriculture l energie le transport et la sante a de quoi nous donner du souci le texte se demande aussi quel rythme d innovation pourrait suffire pour ameliorer ou maintenir notre niveau de vie face a une population qui croit rapidement aux changements climatiques et aux autres defis on passe en revue les principales faillites du marche qui ont pu engendrer une offre insuffisante d innovation et on se demande si la politique d innovation en particulier pour ce qui est de la politique des brevets est efficace pour promouvoir l innovation

josh lerner recipient of the 2010 global award for entrepreneurship research this article describes the academic contributions of the 2010 recipient of the global award for entrepreneurship research professor josh lerner of the harvard business school lerner s empirical research on the inter relationship between venture capital innovation and entrepreneurship has greatly extended and improved our understanding of one of the major drivers of growth in modern economies the first part of this article explains lerner s contributions as regards the structure and organization of the venture capital industry later his most important publications on entrepreneurship innovation and intellectual property rights are surveyed several aspects of lerner s policy oriented work are then outlined before the article closes with a brief conclusion

financing new ventures in china system antecedents and institutionalization abstract china s system for funding new ventures is a relatively recent phenomenon emerging from decades of government led technology policy and a still transitioning business system this paper first proposes a general framework in which this financing system is defined as the country specific configuration of actors rules and practices by which investment funds are pooled investment targets identified funds invested and monitored and returns appropriated the paper uses this framework to link the centralized government system of the 1980s to today s nascent venture capital industry the analysis leads to policy and managerial implications as well as a research agenda for further studies in the chinese context and across different venture financing systems

multistage selection and the financing of new ventures using a random sample of 221 new swedish ventures initiated in 1998 we examine why some new ventures are more likely than others to successfully be awarded capital from external sources we examine venture financing as a staged selection process in which two sequential selection events systematically winnow the population of ventures and influence which ventures receive financing for a venture to receive external financing its founders must first select it as a candidate for external funding and then a financier must fund it we find evidence that founders select ventures as candidates for external finance based on their perceptions of market competition market growth and employment growth while financiers base funding decisions on objective verifiable indicators of venture development such as the completion of organizing activities marketing activities and the level of sales of the venture our findings have implications for venture financing and evolutionary theories of social processes

the hedging role of options and futures under joint price basis and production risk this paper analyzes the optimal production and hedging decisions for firms facing futures price basis and production risk assuming futures and options can be used using constant absolute risk aversion utility and normal distributions the authors derive an exact solution and show that joint production and price risk lead to a hedging role for options risk averse firms that can use each hedging instrument will generally have higher expected output using iowa data for soybeans the parameters of the joint distribution of future prices cash prices and yields are estimated and the results are used to approximate optimal hedging decisions for soybean producers copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

hedging production risk with options the expected utility maximization problem is solved for producers with both price and production uncertainty who have access to both futures and options markets introduction of production uncertainty alters the optimal futures and options position and almost always makes it optimal for the producer to purchase put options and to underhedge on the futures market simulation results lend support to the practice of hedging the minimum expected yield on the futures market and hedging remaining expected production against downside price risk using put options the results are strengthened if the producer expects local production to influence national prices and if risk aversion is higher at low income levels

genco s risk constrained hydrothermal scheduling this paper presents a stochastic midterm risk constrained hydrothermal scheduling algorithm in a generation company genco the objective of a genco is to maximize payoffs and minimize financial risks when scheduling its midterm generation of thermal cascaded hydro and pumped storage units the proposed schedule will be used by the genco for bidding purposes to the iso the optimization model is based on stochastic price based unit commitment the proposed genco solution may be used to schedule midterm fuel and natural water inflow resources for a few months to a year the proposed stochastic mixed integer programming solution considers random market prices for energy and ancillary services as well as the availability of natural water inflows and generators in monte carlo scenarios financial risks associated with uncertainties are considered by applying expected downside risks which are incorporated explicitly as constraints variable time steps are adopted to avoid the exponential growth in solution time and memory requirements when considering midterm constraints a single water to power conversion function is used instead of several curves for representing water head and discharge parameters piecewise linearized head dependant water to power conversion functions are used for computational efficiency illustrative examples examine gencos midterm generation schedules risk levels fuel and water usage and hourly generation dispatches for bidding in energy and ancillary services markets the paper shows that gencos could decrease their financial risks by adjusting expected payoffs

profit distribution and compensation structures in publicly and privately funded hybrid venture capital funds abstract policy makers have become increasingly concerned at the lack of risk capital available to new and early stage entrepreneurial ventures as a public response to a perceived market failure several governments have set up programs to channel equity finance to capital constrained but high potential young enterprises critically government support is often directed through the agency of private venture capital funds we examine the profit distribution and compensation structures used in these hybrid public private funds we appraise government policy makers ability to use these structures to improve the expected returns in market failure areas in order to attract private sector investors and professional managers to participate in these funds the results derived from our simulation study suggest that such asymmetric profit sharing models can only resolve relatively modest market failures unless the programs also manage to attract highly competent investors who are able to produce above average gross returns in market failure areas

determinants of the incidence and scale of seed capital investments by venture capital firms employing both behavioral decision making and agency theories our study seeks to identify those factors that influence a venture capital vc firm s decision to undertake seed capital investments and subsequently the scale of such activity using data on the investments made by 2949 vc funds raised worldwide between 1962 and 2002 we find investor age timing of investment and fund location to be of importance in addition the size of the fund and the existing number of portfolio firms exert opposite influences on the level of seed capital activity of the vc firm these results suggest that seed activity is a valuable source of market intelligence for leading vc firms seeking proactively to identify and invest in novel technologies

a holistic approach for planning natural gas and electricity distribution networks this paper presents a new planning expansion model of an electricity and natural gas distribution system that has high penetration of distributed generation based on natural gas the model entails lower investment costs as compared to traditional planning models that consider both systems electricity and natural gas as independent networks this model is especially convenient for utilities that own both systems as electricity and natural gas customers can derive benefits via electricity or natural gas tariffs if there are significant savings in investment costs for fast growing economies the merging of electricity and natural gas distribution systems is seen as a promising business opportunity in which economies of scope can have lower investment costs so there is a definite need for this type of approach

on growth drivers of high tech start ups exploring the role of founders human capital and venture capital abstract in this paper we jointly analyze the effects of the human capital of founders and access to venture capital vc financing on the growth of 439 italian new technology based firms ntbfs we rely on econometric models that control for survivorship bias and the endogeneity of vc financing as to non vc backed firms the competence based argument that the capabilities of ntbfs coincide with founders skills is confirmed nonetheless once a ntbf obtains vc this coincidence vanishes pointing to the coach function performed by vc investors conversely the view that sees the scout function as the main task performed by vc investors is not supported

exchange rate uncertainty futures markets and the multinational firm abstract we consider a monopolistic risk averse multinational firm which sells and produces at home and abroad under exchange rate uncertainty first we show that the stochastic exchange rate implies higher production and lower sales in the foreign country then we analyze the impact of currency futures markets a separation result is obtained for a multinational firm i e production and the allocation of sales are independent of the distribution of the random exchange rate and of the firm s attitude towards risk we also examine the effect of currency futures on a multinational firm s foreign direct investments in the absence of futures markets we obtain some comparative statics results when risk aversion increases

hedging price risk with options and futures for the competitive firm with production flexibility when some input decisions can be made after price is realized separation between production and hedging decisions still holds only under limited circumstances under the assumption of a restricted profit function that is quadratic in price the optimal futures hedge of a risk averse firm equals expected output and a short straddle position is desirable assuming that futures and options prices are unbiased in this case the use of options not only raises expected utility by reducing income risk but also affects the firm s input decisions in general copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

capital constraints and the performance of entrepreneurial firms in vietnam entrepreneurship has been among the key driving forces of the emergence of a dynamic private sector during the recent decades in vietnam this article addresses for vietnam the questions how capital constraints affect the performance of family firms and how entrepreneurs human and social capital interact with capital constraints to leverage entrepreneurial income a panel of 1721 firms in 4 years is used results are consistent with the resource dependency approach indicating an adverse effect of capital constraints on firm performance firms suffering capital constraints perform substantially better suggesting that they need more capital simply to finance newly recognized profit opportunities human capital plays a vital role in relaxing capital constraints and improves the entrepreneurial performance whereas the effect of social capital stemming from strong ties and weak ties is limited strong ties bring emotional support and weak ties give nonfinancial benefits from regular and useful business contacts advanced econometric analysis tools to take into account the endogeneity of capital constraints are used to establish relationships among relevant variables

contracts and exits in venture capital finance using a sample of european venture capital vc investments i study the relation between vc contracts and exits the data indicate that ex ante stronger vc control rights increase the likelihood that an entrepreneurial firm will exit by an acquisition rather than through a write off or an ipo my findings are robust to controls for a variety of factors including endogeneity and cases in which the vc preplans the exit at the time of contract choice my findings are consistent with control based theories of financial contracting such as aghion and bolton 1992

swinging a double edged sword the effect of slack on entrepreneurial management and growth resource slack represents a double edged sword simultaneously fueling and hindering growth drawing on penrose s growth theory and stevenson s entrepreneurial management theory we have developed and tested a conceptual model that provides a more nuanced account of the resource slack growth relationship using a large dataset spanning six years we have found that slack has a positive direct effect on growth but a negative effect on entrepreneurial management and that entrepreneurial management has a positive effect on growth our empirical and conceptual findings are important to the development of firm growth theory and explicate causal mechanisms transforming slack into firm level outcomes

genco s risk based maintenance outage scheduling this paper presents a stochastic model for the optimal risk based generation maintenance outage scheduling based on hourly price based unit commitment in a generation company genco such maintenance outage schedules will be submitted by gencos to the iso for approval before implementation the objective of a genco is to consider financial risks when scheduling its midterm maintenance outages the genco also coordinates its proposed outage scheduling with short term unit commitment for maximizing payoffs the proposed model is a stochastic mixed integer linear program in which random hourly prices of energy ancillary services and fuel are modeled as scenarios in the monte carlo method financial risks associated with price uncertainty are considered by applying expected downside risks which are incorporated explicitly as constraints this paper shows that gencos could decrease financial risks by adjusting expected payoffs illustrative examples show the calculation of genco s midterm generation maintenance schedule risk level hourly unit commitment and hourly dispatch for bidding into energy and ancillary services markets

factors that determine the reputation of private equity managers in developing markets abstract this paper analyzes the relationship between investors and private equity managers in order to identify the factors that affect the latter s reputation since there are no individual references about their past returns in developing private equity markets the reputation of such players is thought to be linked to their capacity for obtaining new funds results provide evidence of the volume of investments recorded in the past the ratio of portfolio companies to investment manager the percentage of divestments carried out through initial public offerings and trade sales the membership of the national private equity association and the size of funds under management as characteristics of the highest importance in raising funds

what lures cross border venture capital inflows the change in the business model of venture capitalists from investing locally towards investing across borders started to intensify in the late 1990s according to a dataset of european and north american countries we find that countries with higher expected growth and higher lagged stock market returns receive larger net cross border venture capital inflows thus portfolio companies located in high growth and high return countries receive more venture capital from foreign venture capitalists than these countries venture capitalists invest in foreign portfolio companies also countries with lower stock market capitalizations as well as those with poor tax and legal environments for venture capital intermediation exhibit larger net cross border inflows these findings offer important insights for policy makers since cross border venture capital inflows partly compensate for potential limits in the domestic venture capital supply

why do venture capital firms exist theory and canadian evidence executive summary this paper investigates the role of venture capitalists we view their raison d etre as their ability to reduce the cost of informational asymmetries our theoretical framework focuses on two major forms of asymmetric informa tion hidden information leading to adverse selection and hidden ac tion leading to moral hazard our theoretical analysis suggests four em pirical predictions 1 venture capitalists operate in environments where their relative efficiency in selecting and monitoring investments gives them a comparative advantage over other investors this suggests strong industry effects in venture capital investments venture capitalists should be prominent in industries where infor mational concerns are important such as biotechnology computer software etc rather than in rou tine start ups such as restaurants retail outlets etc the latter are risky in that returns show high variance but they are relatively easy to monitor by conventional financial intermediaries 2 within the class of projects where venture capitalists have an advantage they will still prefer projects where monitoring and selection costs are relatively low or where the costs of informational asymmetry are less severe thus within a given industry where venture capitalists would be expected to focus we would also expect venture capitalists to favor firms with some track records over pure start ups

a model of venture capitalist investment activity the paper describes the activities of venture capitalists as an orderly process involving five sequential steps these are 1 deal origination the processes by which deals enter into consideration as investment prospects 2 deal screening a delineation of key policy variables which delimit investment prospects to a manageable few for in depth evaluation 3 deal evaluation the assessment of perceived risk and expected return on the basis of a weighting of several characteristics of the prospective venture and the decision whether or not to invest as determined by the relative levels of perceived risk and expected return 4 deal structuring the negotiation of the price of the deal namely the equity relinquished to the investor and the covenants which limit the risk of the investor 5 post investment activities the assistance to the venture in the areas of recruiting key executives strategic planning locating expansion financing and orchestrating a merger acquisition or public offering 41 venture capitalists provided data on a total of 90 deals which had received serious consideration in their firms the questionnaire measured the mechanism of initial contact between venture capitalist and entrepreneur the venture s industry the stage of financing and product development ratings of the venture on 23 characteristics an assessment of the potential return and perceived risk and the decision vis i vis whether to invest the modal venture represented in the database was a start up in the electronics industry with a production capability in place and seeking 1 million median in outside financing there is a high degree of cross referrals between venture capitalists particularly for the purposes of locating co investors factor analysis reduced the 23 characteristics of the deal to five underlying dimensions namely 1 market attractiveness size growth and access to customers 2 product differentiation uniqueness patents technical edge profit margin 3 managerial capabilities skills in marketing management finance and the references of the entrepreneur 4 environmental threat resistance technology life cycle barriers to competitive entry insensitivity to business cycles and down side risk protection 5 cash out potential future opportunities to realize capital gains by merger acquisition or public offering the results of regression analyses showed expected return to be determined by market attractiveness and product differentiation r2 0 22 perceived risk is determined by managerial capabilities and environmental threat resistance r2 0 33 finally a discriminant analysis correctly predicted in 89 4 of the cases whether or not a venture capitalist was willing to commit funds to the deal on the basis of the expected return and perceived risk the reactions of seven venture capitalists who reviewed the model s specification were used to test its validity

do uk venture capitalists still have a bias against investment in new technology firms abstract the growing economic and political importance of the new economy throughout 1990s has added greater saliency to both supply and demand sides policy oriented questions about the availability of venture capital as a catalyst for new or high technology based early stage investments this paper analyses the changing attitudes of uk venture capital firms to investment in technology enterprises a 1999 survey of 60 uk venture capital firms was structured to be directly comparable to a 1991 study the main findings demonstrate the increasing importance of technology investments to vc firms particularly generalists accordingly the adoption of collaborative strategies to access intellectual capital and complimentary resources via inter firm networks is particularly important the authors conclude that despite material improvements a bias is likely to remain against vc firms involvement in the earliest seed and start up stages of the technology investment cycle

on the positive role of financial intermediation in allocation of venture capital in a market with imperfect information this paper develops a theory of financial intermediation that highlights the contribution of intermediaries as informed agents in a market with imperfect information we consider a venture capital market where the entrepreneurs select the qualities of projects and their perquisite consumptions about which the investors are imperfectly informed it is shown that when all investors have positive search costs the entrepreneurs are induced to offer the unacceptable inferior projects lemons only and the investors will not enter the venture capital market but put their funds in other low return investments an undesirable allocation of resources beginning with an initial undesirable situation the financial intermediaries may evolve as informed agents that induce a pareto preferred allocation leading the investors to a higher welfare state we focus our analysis on the existence of intermediation equilibra when the market for intermediation services is competitive the distribution of returns on projects the fees charged by intermediaries and the fraction of institutional holdings are all endogenous in equilibrium it is shown that i there cannot be a competitive intermediation equilibrium with very high institutional holdings and ii in other cases multiple equilibra may exist but the one with the highest institutional holdings dominates the others in a pareto sense

in search of complementary assets the determinants of alliance formation of high tech start ups abstract why do new technology based firms ntbfs cooperate starting from teece s teece d j 1986 profiting from technological innovation implications for integration collaboration licensing and public policy research policy 15 285 305 conceptual framework and taking advantage of subsequent literature on alliance formation in the resource and competence based tradition and in the social structure perspective we derive an empirical model that aims at highlighting the inducements and obstacles that these firms face in alliance formation according to firm specific characteristics and the nature of the alliance in particular a distinction is made between exploitative commercial alliances and explorative technological alliances the econometric estimates based on a large sample of italian young high tech firms that are observed from 1994 to 2003 provide strong evidence supporting two key intuitions of teece s work first the combination of specialized complementary assets appears to be a key driver of the formation of exploitative commercial alliances by ntbfs more specifically patent holding affects positively the likelihood to establish commercial alliances but this propensity is found to rapidly decrease with firm size suggesting that as long as ntbfs become larger and possess specialized commercial assets their urge for commercial alliances diminishes second following the parallelism set forth by teece between search for alliance partners and access to external financing the analysis indicates that potentially beneficial alliances may not take place because of the high transaction costs faced by smaller ntbfs in this respect our results clearly support the view that sponsor institutions as public research organizations venture and corporate venture capitalists may sensibly reduce these costs and that their role crucially depends on both the identity of the sponsor and the type of alliance

does acquiring venture capital pay off for the funded firms a meta analysis on the relationship between venture capital investment and funded firm financial performance abstract researchers and practitioners frequently propose that venture capital vc is an important resource to increase the performance of funded firms especially in environments of uncertainty in this paper we scrutinize these theoretical propositions following an evidence based research approach we synthesize 76 empirical samples on 36 567 firms we find a small positive performance effect of vc investment on funded firm performance however the effect vanishes if researchers control for industry selection effects furthermore we find that the performance effect mainly relates to firm growth while profitability is unaffected we also uncover that performance effects are reduced when the funded firms are very young or very mature in addition studies focusing on ipo events which constitute the majority of studies determine a substantially smaller performance effect we discuss theoretical implications and offer suggestions for future research on vc

corporate ventures into industrial markets dynamics of aggressive entry abstract this article reports a study of the effect of aggressive entry by firms venturing into new industrial markets there are three main sets of results first there is a significant correlation between the competitive attractiveness of the target industry and the initial share objective set by the corporation venturing into that industry second the downstream share objective set at the launch of the venture is significantly correlated with several key marketing strategy and investment strategy options made by the firm at the start of operations third if most of these key strategy decisions are made under the assumption that a high share position will rapidly be achieved their resulting performance in terms of both market share and roi is superior to firms which enter with less aggressive share aspirations these results are particularly appealing to the large established firm which has the resources and thus can both afford to absorb the cost of failure and afford to make significant front end investments in aggressive initial marketing expenses and investments in initial plant capacity for such firms a feasible strategy for a new venture into an industrial market could be to if possible but not essential seek industries markets to enter which are less likely to provoke rivalrous responses set aggressive market share targets invest aggressively in initial plant capacity develop aggressive sales force sales promotion advertising service quality and or pricing programs relative to competitors as appropriate to the particular industry being entered the reason we suggest that the programs be aggressive as appropriate is that different strategic options are likely to be more effective in one industry than another for instance aggressive advertising and sales promotions could be more effective for consumables while aggressive sales calling programs and superior service delivery could be the more effective route for capital goods businesses

hourly electricity demand response in the stochastic day ahead scheduling of coordinated electricity and natural gas networks this paper studies the role of hourly economic demand response in the optimization of the stochastic day ahead scheduling of electric power systems with natural gas transmission constraints the proposed coordinated stochastic model referred to as egtran considers random outages of generating units and transmission lines and random errors in forecasting the day ahead hourly loads the monte carlo simulation is applied to create multiple scenarios for representing the coordinated system uncertainties the nonlinear natural gas network constraints are linearized and incorporated into the stochastic model numerical results demonstrate the benefits of applying the hourly economic demand response for enhancing the scheduling coordination of natural gas and electricity networks it is demonstrated that electricity demand response would offer a less volatile hourly load profile and locational marginal prices and less dependence on natural gas constraints for the optimal operation of electric power systems the proposed model for egtran could be applied by grid operators for the hourly commitment and dispatch of power system units

the us bankruptcy law and private equity financing empirical evidence the generous personal bankruptcy law in the united states is important to entrepreneurs because failed entrepreneurs can resort to this system to shelter part of their wealth against negative consequences of business failure fan and white journal of law and economics xlvi 543 567 2003 documented that high bankruptcy exemptions provide incentives for entrepreneurs to start own new businesses the partial wealth insurance effect provided by the bankruptcy exemptions also has a significant and negative impact on the entrepreneurs access to bank credits berkowitz and white the rand journal of economics 35 1 69 84 2004 gropp scholz and white the quarterly journal of economics 112 1 217 251 1997 in this article we investigate whether and to what extent the us bankruptcy law has any effect on venture capital vc investment making use of company level information we document that the amount of venture financing received is negatively related to the bankruptcy exemption levels and the number of rounds of financing as well as the number of vc funds involved is negatively associated with bankruptcy exemptions further we report consistent evidences based on state level data with regard to the effects of the us personal bankruptcy law

co development ventures optimal time of entry and profit sharing we find the optimal time for entering a joint venture by two firms and the optimal linear contract for sharing the profits we consider risk sharing timing incentive and asymmetric decisions contract designs if the firms are risk neutral and the cash payments are allowed all three designs are equivalent with risk aversion the optimal contract parameters may vary significantly across the three designs and across varying levels of risk aversion we also analyze a dataset of joint biomedical ventures in which in agreement with our theoretical predictions both royalty and cash payments are mostly increasing in the smaller firm s experience and the time of entry happens sooner for more experienced small firms

the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

the association between venture capitalists selection and value adding behavior evidence from early stage high tech venture capitalists building upon self efficacy and collective effort theories we study the association between the selection behavior of venture capitalists and their involvement in value adding activities we argue that investors who prioritize different characteristics of a business proposal during selection will be more or less confident of their own abilities and the abilities of entrepreneurial teams to effectively add value to portfolio companies and hence will be more or less involved in providing value adding activities in order to test this claim we use a stratified sample comprising 68 european early stage high tech venture capitalists results show that venture capitalists who focus on entrepreneurial team characteristics or financial criteria during selection are less involved in value adding activities compared to their peers who focus on technological criteria we discuss these findings from a theoretical and practical perspective

interdependency of natural gas network and power system security this paper proposes an integrated model for assessing the impact of interdependency of electricity and natural gas networks on power system security the integrated model incorporates the natural gas network constraints into the optimal solution of security constrained unit commitment the natural gas network is modeled by daily and hourly limits on pipelines sub areas plants and generating units the application of fuel diversity e g generating units with fuel switching capability is presented as an effective peak shaving strategy for natural gas demand which could hedge price volatilities of natural gas and electric power the proposed model can be used by a vertically integrated utility for the commitment and dispatch of generating units and the allocation of natural gas for the next day utilization the proposed model can also be used for measuring the security of social services by modeling the interdependency of natural gas and electric power system infrastructures if the proposed model is used by gencos gas constraints will be submitted to electricity markets as energy constraints illustrative examples show the impact of natural gas supply infrastructure on the economic operation of a vertically integrated utility the examples also discuss the impact of generating units with fuel switching capability on the power system security when the supply of natural gas is limited

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

cross hedging with currency options and futures this paper develops an expected utility model of a multinational firm facing exchange rate risk exposure to a foreign currency cash flow currency derivative markets do not exist between the domestic and foreign currencies there are however currency futures and options markets between the domestic currency and a third currency to which the firm has access since a triangular parity condition holds among these three currencies the available yet incomplete currency futures and options markets still provide a useful avenue for the firm to indirectly hedge against its foreign exchange risk exposure this paper offers analytical insights into the optimal cross hedging strategies of the firm in particular the results show the optimality of using options in conjunction with futures in the case of currency mismatching even though cash flows appear to be linear

the diminishing signaling value of patents between early rounds of venture capital financing a long stream of research has documented the positive effects that patents bring about to emerging firms in high technology industries the general consensus is that patents contribute to firm growth because they confer monopolistic market rights offer protection from competitors increase the negotiating position of patent holders and other benefits what has received relatively less attention in the literature is whether patents act as a signal that attracts investors such as venture capital firms the handful of studies that have addressed that question has not analyzed whether the signaling function of patents decreases after the initial attraction of venture capital as information asymmetries between investors and target firms reduce in this study we hypothesize that patent activity has a signaling value that diminishes once information asymmetries between investors and funded firms lessen to study our proposition we draw upon a longitudinal dataset of more than 580 u s based biotechnology firms to empirically demonstrate that biotechnology firms that have submitted patent applications substantially increase the level of funding they receive for their first round of financing in line with a reduction of information asymmetries once the initial investment has materialized patent applications and granted patents have no effect on the growth of venture capital funds raised during the second round of financing we conclude the study with a discussion of avenues for new research implications for policy makers that consider the usefulness of the current patent system and with insights that can be employed by managers of firms in knowledge intensive areas such as biotechnology

venture capitalists and cooperative start up commercialization strategy this paper examines the possible impact of venture capital vc backing on the commercialization direction of technology based start ups by asking to what extent if at all do vc funded start ups engage in cooperative commercialization strategies strategic alliances or technology licensing or both relative to a comparable set of start ups and with what consequences to address these questions i assemble a novel data set that matches firms receiving a federal research and development subsidy through the u s small business innovative research program to vc funded firms by observable characteristics in five technology intensive industries these data allow decoupling of cooperative activity resulting from start up development via the passage of calendar time from that due to association with vcs an analysis of the 696 start ups in the sample split by an external funding source suggests substantial boosts in both cooperative activity associated with vc backed firms and in the likelihood of an initial public offering

corporate entrepreneurship strategy extending the integrative framework through the lens of complexity science whereas our understanding of corporate entrepreneurship ce and corporate entrepreneurship strategy ces continues to expand there has been little theoretical development to support the most extensive framework to date the integrative model of ces as proposed by ireland et al entrep theory pract 33 1 19 46 2009 according to the model ces is built upon the three foundational elements of an entrepreneurial strategic vision a pro entrepreneurship organizational architecture and entrepreneurial processes and behaviors as exhibited throughout the organization ireland et al 2009 p 38 the purpose of this study is to present a broad overarching theory complexity science to examine the key elements and propositions of the ces model complexity science founded on assumptions of interdependent heterogeneous agents and nonlinear interactions as well as non deterministic and potentially extreme outcomes offers established multi level concepts theoretical boundary conditions and methodological guidance for scholars to build and test future studies on ce and ces though our complexity perspective draws extensively from conceptual work on complex adaptive systems and agent based models we ground our arguments on the empirical ubiquity of power law distributions in all constructs and levels of analysis within the ces model we conclude with a detailed research agenda as well as a prescriptive discussion related to theory development quantitative analysis and practical applications to guide future studies on ce

private versus verifiable interim performance evaluations under uncertainty i study the trade off between private and verifiable interim performance evaluations under uncertainty more uncertainty leads to higher agency costs if the interim evaluation is public and verifiable but lower agency costs if the interim evaluation is private and unverifiable

stochastic security constrained unit commitment this paper presents a stochastic model for the long term solution of security constrained unit commitment scuc the proposed approach could be used by vertically integrated utilities as well as the isos in electricity markets in this model random disturbances such as outages of generation units and transmission lines as well as load forecasting inaccuracies are modeled as scenario trees using the monte carlo simulation method for dual optimization coupling constraints among scenarios are relaxed and the optimization problem is decomposed into deterministic long term scuc subproblems for each deterministic long term scuc resource constraints represent fuel and emission constraints in the case of vertically integrated utilities and energy constraints in the case of electricity markets lagrangian relaxation is used to decompose subproblems with long term scuc into tractable short term mip based scuc subproblems without resource constraints accordingly penalty prices lagrangian multipliers are signals to coordinate the master problem and small scale subproblems computational requirements for solving scenario based optimization models depend on the number of scenarios in which the objective is to minimize the weighted average generation cost over the entire scenario tree in large scale applications the scenario reduction method is introduced for enhancing a tradeoff between calculation speed and accuracy of long term scuc solution numerical simulations indicate the effectiveness of the proposed approach for solving the stochastic security constrained unit commitment

gender disparity in angel financing this study uses unique hand collected data from a televised entrepreneurial pitch competition to examine gender differences in obtaining angel financing results indicate that while the yield rates between male and female teams do not differ a gender disparity in the amount of angel funding does in fact exist female teams receive less capital and provide more equity relative to their male counterparts even when controlling for typical determinants of investment such as industry and prior company success further we find that female teams receive investments with lower valuations than their male counterparts largely because they initially offer higher equity stakes for less capital thus this suggests that limitations to angel financing of female entrepreneurial ventures may be partly self imposed

what do economists tell us about venture capital contracts venture capital markets are characterized by multiple incentive problems and asymmetric information in an uncertain environment all kinds of agency problems are present moral hazard adverse selection hold up problems window dressing etc entrepreneurs and venture capitalists enter into contracts that influence their behavior and mitigate the agency costs in particular they select an appropriate kind and structure of financing and specify the rights as well as the duties of both parties the typical features of venture capital investments are an intensive screening and evaluation process an active involvement of venture capitalists in their portfolio companies a staging of capital infusions the use of special financing instruments such as convertible debt or convertible preferred stock syndication among venture capitalists or a short investment horizon

deal structuring in philanthropic venture capital investments financing instrument valuation and covenants philanthropic venture capital phvc is a financing option available for social enterprises that like traditional venture capital provides capital and value added services to portfolio organizations differently from venture capital phvc has an ethical dimension as it aims at maximizing the social return on the investment this article examines the deal structuring phase of phvc investments in terms of instrument used from equity to grant valuation and covenants included in the contractual agreement by content analyzing a set of semi structured interviews and thereafter surveying the entire population of phvc funds that are active in europe and in the united states findings indicate that the non distribution constraint holding for non profit social enterprises is an effective tool to align the interests of both investor and investee this makes the investor behaving as a steward rather than as a principal conversely while backing non profit social ventures philanthropic venture capitalists structure their deal similarly as traditional venture capital as the absence of the non distribution constraint makes such investments subject to moral hazard risk both in terms of perks and stealing and social impact focus

multiperiod production with forward and option markets production and hedging in both forward and options markets are analyzed for forward looking firms that maximize expected utility in the presence of unbiased forward and options prices it is shown that such firms will use options as hedging instruments this result contrasts with the conclusions from studies that assume myopic behavior and occurs because forward looking agents care about the effect of future output prices on profits from future production cycles simulations support the theoretical results and show how the introduction of an options market influences the optimal forward position

optimal bidding and hedging in international markets this paper examines the optimal bidding and hedging decisions of a risk averse contractor for a construction project abroad we show that currency options play no role as a hedging instrument when the contractor has a quadratic utility function however if the contractor is prudent currency options are used for hedging purposes prudence thus generates a hedging demand for currency options when foreign exchange exposure is uncertain contrary to the conventional wisdom we show that currency hedging may have perverse effects on the contractor s bidding behavior in a canonical example with negative exponential utility functions we demonstrate that the possibilities for the contractor to bid more aggressively in the absence of currency hedging are not factitious

hedging price risk when real wealth matters abstract this paper analyzes optimal hedging of a tradable risk e g price risk or exchange rate risk with forward contracts in the presence of untradable inflation risk utility is defined over real wealth optimal forward positions are derived relative to a given initial exposure in the tradable risk a nominally unbiased forward market usually implies a non zero real risk premium and hence some risk taking if untradable inflation risk is a monotone function of the tradable risk plus noise cross hedging and speculating on the real risk premium are conflicting objectives the level of relative risk aversion determines which objective is dominant in a nominally unbiased forward market

bargaining size and return in venture capital funds abstract the terms of an investment by venture capitalists are the result of cooperative bargaining between the project originators owners or entrepreneurs and the financiers this study examines conditions under which bargains can be consummated the nature of the bargains and the way in which bargains are both influenced by venture fund size and also contribute to a theory of fund size as much as possible the theory of fund size and earnings is related to required rate of return concepts with the objective of explaining relative variations in the value of venture capital funds and of incorporating such investments within the general body of finance theory the most basic form of contract is a simple bilateral bargain between owners and fund managers with the shares of financing and earnings as the bargaining variables agency and other considerations can be factored into the resulting project value to be financed and partitioned an edgeworth box construction is used to establish the efficient pareto optimal set as the contract curve the two endpoints of the contract curve correspond respectively to the monopoly solution where there is one fund and many owners and to the competitive solution the nash bargaining solution of game theory can also be exhibited within this framework although we are careful to remain agnostic about whether or not this constitutes the only or even the best solution a first requirement is that some basis for agreement exists so that mutually beneficial bargains can actually be struck conditions most favorable to existence arise where 1 owners who cannot properly diversify their own investments are more risk averse or else suffer from some other financing impediment or 2 owners are more optimistic than fund managers on the prospects for the project fund size operating via the cost of capital can also affect the existence of solutions given that contracting is mutually beneficial the precise terms depend upon the relative bargaining power of funds versus owners this may depend upon required rates of return it also depends upon market structure the environment may be more conducive to monopoly surplus if search impediments exist for owners as they might for technological projects or if the market is in an early stage of development bargains are often asymmetric wherein the fund derives a higher share of earnings than pro rata with its share of financing fund size and bargaining power are related especially where fund investors or managers rely on the fund for portfolio or internal diversification as opposed to external diversification in which they invest extensively in other assets with internal diversification the fund s cost of capital is size dependent in terms of the number of projects on the books larger funds acquire bargaining power via a lower cost of capital leading to higher rates of actual returns and therefore higher fund value such effects are not present where investors have external diversification because fund returns are generally asymmetric arising from the significant risk of project failures it is sometimes thought that the asymmetry constitutes a factor to be priced as the asymmetry is size dependent this would make the cost of capital size dependent as well however it turns out that the asymmetry is not in fact priced and that standard capm arguments continue to hold thus for external diversification fund size is mainly a matter of economies of scale in administration evaluation and monitoring in all cases fund size can be described in terms of equality at the margin between required and available rates of return and we describe the influences that impinge on both schedules generally speaking the kinds of bargains actually observed as well as the rates of return and variations therein across funds and over time are all consistent with predicted bargaining features they appear also to be consistent with basic finance theory suggesting that special features such as failure to maximize the expected utility of monetary returns are not really needed

milestone payments or royalties contract design for r d licensing we study how innovators can optimally design licensing contracts when there is incomplete information on the licensee s valuation of the innovation and limited control over the licensee s development efforts a licensing contract typically contains an up front payment milestone payments at successful completion of a project phase and royalties on sales we use principal agent models to formulate the licensor s contracting problem and we find that under adverse selection the optimal contract structure changes with the licensee s valuation of the innovation as the licensee s valuation increases the licensor s optimal level of involvement in the development directly or through royalties should decrease only a risk averse licensor should include both up front and milestone payments moral hazard alone is not detrimental to the licensor s value but may create an additional value loss when combined with adverse selection our results inform managerial practice about the advantages and disadvantages of the different terms included in licensing contracts and recommend the optimal composition of the contract

indirect hedging of exchange rate risk abstract the purpose of this study is to investigate the impact of exchange rate risk upon export production when the firm cannot engage in a direct forward hedge in the exchange rate however there exists a forward market for a domestic financial asset correlated with the exchange rate in question exporting firms using such an indirect hedging device to reduce foreign exchange risk do not necessarily increase their output when such unbiased hedging market becomes available this contrasts with the well known result in the case of direct hedging

optimal hedging in a futures market with background noise and basis risk abstract this paper examines hedging behavior in an incomplete market in which there exists an unhedgeable and uninsurable independent background risk in the case of a basis risk that satisfies the regressibility property the background risk might be partly endogenous background risk generally has an ambiguous effect on the optimal hedge ratio however if preferences exhibit standard risk aversion and the background risk is fully exogenous the qualitative effect of the added background risk is determinate and depends on the direction of any bias in the futures market in all cases the speculative component of the hedge ratio is reduced in the presence of background risk when the background risk is a basis risk and futures prices exhibit normal backwardation this qualitative effect need not hold and it depends in part on the direction of regressability for spot and futures prices

political connections and entrepreneurial investment evidence from china s transition economy abstract recent literature in entrepreneurship suggests that market and legal institutions matter for entrepreneurial investment yet prior studies have focused on the role of formal institutions building on new institutional theory and political connections literature this study aims to evaluate the role of political connections in entrepreneurial reinvestment in less developed and transition economies the purpose of this paper is threefold first it aims to demonstrate systematically how political connections affect entrepreneurial reinvestment second it applies this relationship to a subsample group i e small and medium enterprises smes in order to empirically test whether political connections are more beneficial for large firms or smes third it demonstrates that political connections substitute for rather than complement formal market and legal institutions the empirical test uses a nationally representative sample of entrepreneurial firms from china s transition economy

venture capital internationalization synthesis and future research directions research on venture capital internationalization vc has expanded rapidly over the last decade this paper reviews the extant literature on vc internationalization and highlights gaps in our knowledge we identify three major research streams within this literature which revolve around the following questions 1 which vc firms invest across borders and what countries do they target with a macro economic or a micro economic focus 2 how do vc firms address the liabilities of non domestic investing and 3 what are the real effects of international vc investments we provide an overview of the contributions in these research streams discuss the role of public policy and suggest avenues for future research specifically we call for a deeper understanding of 1 the functioning and impact of vc firms modes of internationalization 2 micro level processes such as the functioning and decision making of international investment committees the interaction between headquarters and local offices or the development of international human and social capital 3 the role of country institutions in vc internationalization and its real effects and 4 the interplay of international vc with alternative financing sources

contracting signaling and moral hazard a model of entrepreneurs angels and venture capitalists abstract investment by wealthy individuals known as angels in startup firms is quite significant and has taken off in the last few years angels invest in the company at an earlier stage than venture capitalists vcs do this paper examines the relationship between an entrepreneur an angel and a vc from the seed investment made by the angel to the exit stage the study characterizes the equilibrium contracts among the players and provides insights into the related institutional arrangements next the study examines the signaling aspects of the game the paper also analyzes the moral hazard problems of the entrepreneur and the vc it shows that the outcome in a startup firm is not efficient because of the free rider phenomenon

determinants of required return in venture capital investments a five country study abstract using two complementary theoretical perspectives we develop hypotheses regarding the determinants of the return required by venture capitalists and test them on a sample of over 200 venture capital companies vccs located in five countries consistent with resource based theory we find that early stage specialists require a significantly higher return than other vccs when investing in later stage ventures consistent with financial theory we find that acquisition buyout specialists require a significantly lower return than other vccs when investing in expansion companies furthermore in comparison to specialists highly stage diversified vccs require a significantly higher return for early stage investments independent vccs require a higher rate of return than captive or public vccs in general higher required returns are associated with vccs who provide more intensity of involvement have shorter expected holding period of the investment and being located in the us or uk in comparison to those in france belgium and the netherlands

optimal hedging of uncertain and long term foreign exchange exposure abstract this paper employs stochastic dynamic programming to analyze two hedging problems which arise frequently especially in international finance one is the hedging of an uncertain exposure when the arrival of new information is anticipated it is shown that a risk averse agent will hedge a fraction of his maximum potential exposure to reduce risk the second problem concerns hedging an exposure which extends beyond the delivery date of the available forward contract the solution yields a rule by which successive contracts can be linked to form an optimal hedging strategy a short empirical study illustrates this rule

robust financial contracting and the role of venture capitalists we derive a role for inside investors such as venture capitalists in resolving various agency problems that arise in a multistage financial contracting problem absent an inside investor the choice of securities is unlikely to reveal all private information and overinvestment may occur an inside investor however always makes optimal investment decisions if and only if he holds a fixed fraction contract where he always receives a fixed fraction of the project s payoff and finances that same fraction of future investments this contract also eliminates any incentives of the venture capitalist to misprice securities issued in later financing rounds in this article we develop a model of financial contracting with multiple investment decisions and show how conflicts of interest and informational asymmetries can be effectively resolved by an inside investor i e an investor who not only provides capital but also works closely with the firm monitors it frequently and is generally very well informed about the firm s prospects and investment opportunities venture capitalists are obvious examples of inside investors and their function has been an important motivation for this article banks especially in japan and germany are also involved in monitoring and can be viewed as playing the role of inside investors in this article we examine the potential benefits of inside investors in a context where there are no restrictions beyond limited liability on the type of financial contracts that can be written we address a basic financial contracting problem involving an entrepreneur who has an idea for a project but does not have sufficient capital to fund it an important assumption is that there are several stages in the project s development and that a decision must be made at each stage whether the project should be continued or abandoned if the project is continued the amount of additional capital to be invested must also be determined we assume that the entrepreneur as an insider observes private information about the project s profitability at each stage this information is not

impact of natural gas system on risk constrained midterm hydrothermal scheduling this paper studies the impact of natural gas ng contracts and constraints on a genco s midterm risk constrained hydrothermal scheduling problem the ng contracts and constraints are modeled as a set of linear equations the proposed model utilizes the stochastic price based unit commitment pbuc the pbuc hourly solution considers uncertainties of market prices for energy and ancillary services uncertainties of natural water inflows and random ng infrastructure interruptions in monte carlo scenarios illustrative examples analyze the genco s risk levels when considering midterm schedules for generating units target payoffs and usages of water inflow ng and other thermal resources simulation results show that a genco s midterm schedules and financial risks could be impacted significantly with the consideration of ng contracts and constraints

production hedging and speculative decisions with options and futures markets this paper analyzes production hedging and speculative decisions when both futures and options can be used in an expected utility model of price and basis uncertainty when futures and option prices are unbiased optimal hedging requires only futures options are redundant options are used together with futures as speculative tools when market prices are perceived as biased straddles are used to speculate on beliefs about price volatility and to hedge the futures position used to speculate on beliefs about the expected value of the futures price mean variance analysis in general is not consistent with expected utility when options are allowed one extension of sandmo s expected utility model of the competitive firm under price uncertainty considers the use of futures or forward contracts danthine holthausen and feder just and schmitz show that without basis uncertainty the optimal output level is not affected by price risk also with an unbiased futures price the optimal hedging level of the competitive firm is the full hedge while a biased futures price will result in a partly speculative hedge related works include batlin who allows for basis risk in the form of imperfect time hedging paroush and wolf and antonovitz and nelson who consider basis risk with the simultaneous availability of futures and forward contracts grant honda losq newbery and stiglitz and rolfo who allow for production uncertainty chavas and pope who allow for production uncertainty and hedging costs and karp who considers the problem in a dynamic setting this paper provides a further extension of this analysis by allowing options as a means of coping with price risk with the introduction of commodity options on futures for many commodities in the 1980s this problem appears relevant to a number of production settings especially in agriculture specifically this paper considers the simultaneous choice of a production level and of hedging levels of futures and options within the general expected utility model the model allows for basis uncertainty but the production process is assumed to be nonstochastic

you are known by the directors you keep reputable directors as a signaling mechanism for young firms in this paper we develop an analytical model of outside directors signaling role a role that is especially important for entrepreneurial firms we formally demonstrate that in the face of a market failure in which stakeholders refuse to align themselves with new firms high quality new ventures may be able to credibly signal their type by appointing reputable directors to their boards however this option is not universally feasible both directors reputations and the quality of their information determine the effectiveness of this strategy in contrast to earlier adverse selection models we demonstrate that when the middlemen directors have incomplete information on firm quality bad and good firms can coexist in equilibrium in this equilibrium the quality of the directors information determines the mix of good and bad firms in the population of surviving firms avenues for future research and normative implications for practitioners are discussed

entrepreneurial ability venture investments and risk sharing a number of issues that relate to the desirability and implications of new venture financing are examined within a principal agent framework that captures the essence of the relationship between entrepreneurs and venture capitalists the model suggests 1 as long as the skill levels of entrepreneurs are common knowledge all will choose to involve venture capital investors since the risk sharing provided by outside participation dominates the agency relationship that is created 2 the less able entrepreneurs will choose to involve venture capitalists whereas the more profitable ventures will be developed without external participation because of the adverse selection problem associated with asymmetric information 3 if a costly signal is available that conveys the entrepreneur s ability some entrepreneurs will invest in such a signal and then sell to investors these entrepreneurs however need not be the more able ones the implications for new venture financing of these and other findings are discussed and illustrated by example

export flexibility and currency hedging this article studies the behavior of an export flexible firm under exchange rate uncertainty we show that the separation theorem holds if selling exclusively in the domestic market is suboptimal even under the most unfavorable spot exchange rate otherwise the firm s optimal output depends on its preferences and on the underlying uncertainty we further show that the full hedging theorem holds only when the firm always finds it optimal to sell its entire output in the foreign market otherwise export flexibility introduces a convexity into the firm s foreign exchange risk exposure which calls for the use of currency options for hedging purposes

venture capitalist certification in initial public offerings this paper provides support for the certification role of venture capitalists in initial public offerings consistent with the certification hypothesis a comparison of venture capital backed ipos with a control sample of nonventure capital backed ipos from 1983 through 1987 matched as closely as possible by industry and offering size indicates that venture capital backing results in significantly lower initial returns and gross spreads in effect the presence of venture capitalists in the issuing firms serves to lower the total costs of going public and to maximize the net proceeds to the offering firm in addition we document that venture capitalists retain a significant portion of their holdings in the firm after the ipo the ability of third party specialists to certify the value of securities issued by relatively unknown firms in capital markets that are characterized by asymmetric information between corporate insiders and public investors has attracted much academic interest in recent years several authors including james 1990 blackwell marr and spivey 1990 and barry muscarella peavy and vetsuypens 1991 have developed and tested models based at least in part on the formal certification hypothesis presented in booth and smith 1986 a related body of work represented by deangelo 1981 beatty and ritter 1986 titman and trueman 1986 johnson and miller 1988 carter 1990 simon 1990 and carter and manaster 1990 has examined how investment bankers and auditors help resolve the asymmetric information inherent in the initial public offering ipo process in this paper we examine whether the presence of venture capitalists as investors in a firm going public can certify that the offering price of the issue reflects all available and relevant inside information we hypothesize that venture capitalists can perform this function that it will be an economically

learning and incentive problems in repeated partnerships this paper analyzes optimal contracts for financing risky new projects in a two period agency model the principal and t he agent both learn about the project quality and the agent s unobservable actions affect the learning process the parties have access to the credit market compared to the short term contracts the long term contract induces the agent to work harder less hard in period one if his marginal effort in the first period increases reduces the value of information in both cases the long term contract enables the parties to learn more about the project type copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association