optimal contracting and the organization of knowledge we study contractual arrangements that support an efficient use of time in a knowledge intensive economy in which agents endogenously specialize in either production or consulting the resulting market for advice is plagued by informational problems since both the difficulty of the questions posed to consultants and the knowledge of those consultants are hard to assess we show that spot contracting is not efficient because lemons in this case self employed producers with intermediate knowledge cannot be appropriately excluded from the market however an ex ante firm like contractual arrangement uniquely delivers the first best this arrangement involves hierarchies in which consultants are full residual claimants of output and compensate producers via incentive contracts this simple characterization of the optimal ex ante arrangement suggests a rationale for the organization of firms and the structure of compensation in knowledge intensive sectors our findings correspond empirically to observed arrangements inside professional service firms and between venture capitalists and entrepreneurs

valuation and control in venture finance this paper presents the model of a relationship between a venture capitalist and an entrepreneur engaged in the formation of a new firm i assume that the entrepreneur derives private nonpecuniary benefits from having some control over the firm i show that to separate the entrepreneur s value of control from the firm s expected payoff the venture capitalist demands disproportionately higher control rights than the size of his equity investment the entrepreneur is compensated for a greater loss of control through better terms of financing ability to extract higher rents from asymmetric information and improved risk sharing venture capital firms often finance projects which at the time of funding have neither revenues nor even a product in existence however by using an intricate system of control rights venture capitalists can overcome many failures inevitable in a complex task of converting entrepreneurial talent into companies products and markets

financial contracting theory meets the real world an empirical analysis of venture capital contracts we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory we do so by studying the actual contracts between venture capitalists vcs and entrepreneurs the distinguishing characteristic of vc financings is that they allow vcs to separately allocate cash flow rights board rights voting rights liquidation rights and other control rights we describe and measure these rights we then interpret our results in relation to existing financial contracting theories we also describe the interrelation and the evolution across financing rounds of the different rights query 1 query 2

a liquidity based model of security design we consider the problem of the design and sale of a security backed by specified assets given access to higher return investments the issuer has an incentive to raise capital by securitizing part of these assets at the time the security is issued the issuer s or underwriter s private information regarding the payoff of the security may cause illiquidity in the form of a downward sloping demand curve for the security the severity of this illiquidity depends upon the sensitivity of the value of the issued security to the issuer s private information thus the security design problem involves a tradeoff between the retention cost of holding cash flows not included in the security design and the liquidity cost of including the cash flows and making the security design more sensitive to the issuer s private information we characterize the optimal security design in several cases we also demonstrate circumstances under which standard debt is optimal and show that the riskiness of the debt is increasing in the issuer s retention costs for assets

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

contractibility and the design of research agreements we analyze how contractibility affects contract design a major concern when designing research agreements is that researchers may use their funding to subsidize other projects we show that when research activities are not contractible an option contract is optimal the financing firm obtains the option to terminate the agreement and in case of termination broad property rights the threat of termination deters researchers from cross subsidization and the cost of exercising the termination option deters the financing firm from opportunistic termination we test this prediction using 580 biotechnology research agreements contracts with termination options are more common when research is non contractible

undp s gender related indices a critical review abstract this paper critically reviews the two gender related indices proposed by undp in the 1995 human development report the gender related development index gdi and the gender empowerment measure gem while supporting the need to develop indicators that reliably track women s empowerment gem as well as the impact of gender inequality on overall human development gdi we argue that the particular ways in which these indices were constructed and the assumptions made to overcome data gaps severely limit their usefulness and result in very misleading international comparisons wherever appropriate we suggest remedies for some of the shortcomings identified

knowledge and venture funding complementarities and financial contracts in this article i analyse venture capital finance using the tools provided by the literature on the economics of innovation in particular the notion of localised technological knowledge and the resource based theory of the firm to build a model of financial contracting this entails that instead of looking exclusively at financial indicators or monetary incentives i will deepen the knowledge connection between the venture capitalist and the financed firm as the benchmark to understand the potential of this source of finance consistent with evidence regarding venture funding the model portrays a separation between a financial and a non financial part of the venture investment which is reflected in a dichotomy among the investors in fact the model shows that the success of a venture program is strictly linked to the knowledge flow inspired and reinforced by the complementarities between the knowledge bases of entrepreneur and venture capitalist instead to a particular financing scheme as sustained by most of the literature the model can also suggest a new methodology to analyse other intermediaries always exploiting the central role of knowledge in designing financial contracts copyright 2007 oxford university press

the determinants of private saving in india abstract this paper examines the determinants of private saving in the process of economic development in the light of the indian experience it is found that the saving rate rises with both the level and the rate of growth of disposable income the real interest rate on bank deposits has a significant positive impact but the magnitude of the impact is modest public saving seems to crowd out private saving but less than proportionately furthermore the spread of banking facilities in the economy and the inflation rate have a positive impact and changes in the external terms of trade a negative impact on private saving

venture capitalists as principals contracting screening and monitoring there is a large academic literature on the principal agent problem in financial contracting this literature focuses on the conflicts of interest between an agent who is an entrepreneur with a venture that needs financing and a principal who is the investor providing the funds for the venture theory has identified a number of ways that the investor principal can mitigate these conflicts first the investor can structure financial contracts i e the allocation of cash flow and control rights between the entrepreneur and investor to provide incentives for the entrepreneur to behave optimally second the investor can engage in information collection before deciding whether to invest in order to screen out ex ante unprofitable projects and bad entrepreneurs and third the investor can engage in information collection and monitoring once the project is under way despite the large volume of theory empirical work has lagged behind in comparing the contracts and actions of real world principals to their counterparts in financial contracting theory in this paper we describe recent empirical work and its relation to theory for one prominent class of such principals venture capitalists vc s in our view vc s are real world entities that closely approximate the investors of theory vc s invest in entrepreneurs who need financing to fund a promising project or company vc s have strong incentives to maximize value but at the same time receive few or no private benefits of control although they are intermediaries vc s typically receive at least 20 percent of the profits on their portfolios see paul gompers and josh lerner 1999 in addition to being interesting from a theoretical perspective vc actions and contracts of are interesting from a practical perspective vc s have been extremely successful in the last several years i they have been associated with a number of the prominent corporate successes like ariba cisco ebay and yahoo ii they have generated substantial returns and wealth for their investors and iii they have raised and invested record amounts of money

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

incomplete contracts and the theory of the firm what have we learned over the past 25 years incomplete contracts and the theory of the firm what have we learned over the past 25 years

control rights and capital structure an empirical investigation we show that incentive conflicts between firms and their creditors have a large impact on corporate debt policy net debt issuing activity experiences a sharp and persistent decline following debt covenant violations when creditors use their acceleration and termination rights to increase interest rates and reduce the availability of credit the effect of creditor actions on debt policy is strongest when the borrower s alternative sources of finance are costly in addition despite the less favorable terms offered by existing creditors borrowers rarely switch lenders following a violation a fundamental question in financial economics is how do firms choose their financial policies extant empirical research on this question has focused primarily on the presence of taxes and bankruptcy costs e g scott 1976 information asymmetry e g myers and majluf 1984 and more recently market timing behavior e g baker and wurgler 2002 however beginning with jensen and meckling 1976 a large body of theoretical research examines how incentive conflicts between managers and external investors affect corporate financial policies in particular theoretical research on financial contracting shows that in the presence of incentive conflicts optimal debt contracts will allocate certain rights to creditors after negative performance in order to help firms secure financing ex ante e g aghion and bolton 1992 and dewatripont and tirole

financing a portfolio of projects this article shows that investors financing a portfolio of projects may use the depth of their financial pockets to overcome entrepreneurial incentive problems competition for scarce informed capital at the refinancing stage strengthens investors bargaining positions and yet entrepreneurs incentives may be improved because projects funded by investors with shallow pockets must have not only a positive net present value at the refinancing stage but one that is higher than that of competing portfolio projects our article may help understand provisions used in venture capital finance that limit a fund s initial capital and make it difficult to add more capital once the initial venture capital fund is raised jel g24 g31 venture capital finance takes place in an environment of severe informational asymmetries and incentive problems venture capitalists not only must assess the quality of investment proposals submitted to them for funding but once the initial funding has taken place they must also give the right incentives to the entrepreneurs and monitor the performance of the portfolio companies on an ongoing basis this article departs from most of the existing literature by explicitly recognizing that venture capitalists manage a portfolio of projects the need for portfolio management arises if the amount of capital both financial and human available to a venture capital fund is limited implying that venture capitalists must carefully choose which projects to allocate their scarce financial and human resources to 1 by staging their investments venture capitalists retain the right to deny capital infusions to particular

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

top executive rewards and firm performance a comparison of japan and the united states this paper studies top executive turnover and compensation and their relation to firm performance in the largest japanese and u s companies japanese executive turnover and compensation are related to earnings stock returns and to a lesser extent sales performance measures the fortunes of japanese top executives therefore are positively correlated with stock performance and current cash flows or with factors contributing to such performance the relations for the japanese executives are generally economically and statistically similar to those for their u s counterparts there is some evidence however that the fortunes of japanese executives are more sensitive to low income but less sensitive to stock returns than those of u s executives

do venture capitalists function the same the evidence from the chinese newest stock market chinext we examine the role of venture capitals vc in chinese entrepreneurial firms surrounding their initial public offerings ipos on chinext we find vcs are more likely to invest in entrepreneurial firms close to their registered location unlike developed countries chinese vcs cannot significantly improve firms corporate governance and operating performance on chinext these results indicate these vcs are more free riders rather than value added investors the empirical findings suggest chinese government should restructure chinext or reform primary market regulations to encourage vcs to make more value added activities and improve the financing environment of small to medium sized enterprises vcs are still new on the chinext

information and control in ventures and alliances this paper develops a theory of control as a signal of congruence of objectives and applies it to nancial contracting between an investor and a privately informed entrepreneur we show that formal investor control is i increasing in the information asymmetries ex ante ii increasing in the uncertainty surrounding the venture ex post iii decreasing in the entrepreneur s resources and iv increasing in the entrepreneur s incentive consict in contrast real investor control that is actual investor interference is decreasing in information asymmetries control rights are further such that control shifts to the investor in bad states of nature

liquidation values and the credibility of financial contract renegotiation evidence from u s airlines how do liquidation values affect financial contract renegotiation while the incomplete contracting theory of financial contracting predicts that liquidation values determine the allocation of bargaining power between creditors and debtors there is little empirical evidence on financial contract renegotiations and the role asset values play in such bargaining this paper attempts to fill this gap we develop an incomplete contracting model of financial contract renegotiation and estimate it using data on the airline industry in the united states we find that airlines successfully renegotiate their lease obligations downward when their financial position is sufficiently poor and when the liquidation value of their fieet is low our results show that strategic renegotiation is common in the airline industry moreover the results emphasize the importance of the incomplete contracting perspective to real world financial contract renegotiation

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

the impact of the affiliation of venture capital firms a survey the aim of this paper is to review the theoretical and empirical literature on the impact of the affiliation of venture capital vc firms with a particular focus on the differences between europe and the us a main characteristic of vc firms is their high level of involvement in the management of funded firms however the vc industry is composed of heterogeneous actors the literature has studied to a great degree the independent funds that dominate the us market yet there also exist vc funds affiliated with banks or with industrial firm which can benefit from synergies with their parent corporation several studies have highlighted significant differences between these types of vc firms

staged financing an agency perspective this paper investigates the structure of outside investment in a profitable entrepreneurial venture though efficient financing the venture up front may be infeasible because the entrepreneur cannot commit to not renegotiate down the outside investor s claim once she s sunk her investment staging the investment over time helps to mitigate this commitment problem the early rounds of investment create collateral that support the later rounds we characterize the optimal staged investment path and show how it is affected by various features of the venture the predictions of the model are consistent with observations on staged financing in venture capital

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

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

intertemporal substitution exogeneity and surprises estimating life cycle models for canada the authors estimate consumption and labor supply models for canada using u s variables as instruments instead of lagged canadian variables the results suggest that the endogeneity of lagged variables has not been a serious problem in previous studies they also develop estimation methods for use when the agents information sets are unknown and the model contains the realization and the innovation of an endogenous variable the authors use the approach to estimate a labor supply model combining intertemporal substitution and job search and to estimate the labor supply and consumption responses to marginal utility of income changes induced by wage price and interest rate surprises

staging of venture capital investment a real options analysis this paper uses contingent claims analysis to investigate the staging decision of venture capitalist vc in a principal agent framework venture capital investment opportunities are modeled as real options with multiple volatilities and the entrepreneur s incentive is assumed to maximize the probability of getting funded in the next financing round two celebrated formulae in the option pricing literature are generalized to evaluate these real options we find that staging not only gives the vc a waiting option but also mitigates the agency problem of the entrepreneur undertaking too conservative activities moreover we find that the vc tends to stage her investment when the expected growth rate of the venture s market value is lower however the risk free interest rate is not an important factor in the staging decision our model also provides a good explanation for existing empirical evidence on the staging of venture capital investment

optimal exercise of jointly held real options a nash bargaining approach with value diversion this paper provides a two stage decision framework in which two or more parties exercise a jointly held real option we show that a single party s timing decision is always socially efficient if it precedes bargaining on the terms of sharing however if the sharing rule is agreed before the exercise timing decision is made then socially optimal timing is attained only if there is a cash payment element in the division of surplus if the party that chooses the exercise timing can divert value from the project then the first best outcome may not be possible at all and the second best outcome may be implemented using a contract that is generally not optimal in the former cases our framework contributes to the understanding of a range of empirical regularities in corporate and entrepreneurial finance

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

the determinants of household and private savings in thailand a broad set of possible determinants of household and private savings behaviour is examined through an in depth case study of thailand during the period 1960 to 2004 results suggest that an increase in economic growth inflation and terms of trade all have a significant positive impact on household and private saving rates in contrast the availability of bank credit tends to reduce household and private saving rates while an increase in both old and young dependency has a negative impact on household and private saving rates the magnitude of the impact on the former is far greater than that on the latter furthermore public saving seems to crowd out household and private saving but less than proportionately this reflects a possible role of fiscal policy in increasing national savings in the economy over and above these variables corporate saving is another important determinant of household saving an increase in the former brings about a significant reduction in the latter

law regulation and the business climate the nature and influence of the world bank doing business project the importance of a well functioning legal and regulatory system in creating an effective market economy is now widely accepted one flagship project that tries to measure the environment in which businesses operate in countries across the world is the world bank s doing business project which was launched in 2002 this project gathers quantitative data to compare regulations faced by small and medium size enterprises across economies and over time the centerpiece of the project is the annual doing business report it was first published in 2003 with five sets of indicators for 133 economies and currently includes 11 sets of indicators for 189 economies the report includes a table that ranks each country in the world according to its scores across the indicators the doing business project has become a major resource for academics journalists and policymakers the project also enjoys a high public profile with close to ten million hits on its website each year with such interest it s no surprise that the doing business report has come under intense scrutiny in 2012 following discussions by its board the world bank commissioned an independent review panel to evaluate the project on which i served as a member in this paper i first describe how the doing business project works and illustrate with some of the key findings of the 2015 report next i address what is valuable about the project the criticisms of it and some wider political economy issues illustrated by the report

ethnic matching in the u s venture capital market we document the role of entrepreneurial founder and venture capital vc partner co ethnicity in shaping investment relationships co ethnicity increases the likelihood that a vc firm invests in a company conditional on investment co ethnicity strengthens the degree of involvement by raising the likelihood of vc board of director involvement and increasing the size and scope of investment these results are consistent with trust and social network based mechanisms shared ethnicity in our sample is associated with worse investment outcomes as measured by investment liquidity however which our results suggest might stem from looser screening and or corporate governance

incentives in university technology transfers there are two main ways in which the knowledge created in universities has been transferred to firms licensing agreements and the creation of spin offs in this paper we describe the main steps in the transfer of university innovations the main incentive issues that appear in this process and the contractual solutions proposed to address them

salaries and piece rates compensation can take many forms remuneration can come as pecuniary payments as fringes such as health and pension benefits or as a nonpecuniary reward such as plush office furniture that costs the firm less than it benefits the worker a significant literature has examined the trade offs between pecuniary and nonpecuniary compensation the modern work having been pioneered by rosen 1974 more recently another body of literature has examined the selection of method of total compensation ignoring the distinction between pecuniary and nonpecuniary payment this work has focused on risk and incentive factors it has resulted in comparisons of compensation based on absolute output levels to that based on relative performance it has also led to explorations of the relation of compensation to experience over the work life 2 little attention has been paid to what may be among the most important and obvious distinction in methods of compensation namely the choice between a fixed salary for some period of time that is paying on the basis of input and some workers receive compensation that is specified in advance and not directly contingent on performance instead it depends on an input measure such as hours worked for others compensation is directly related to output this essay is an attempt to predict a firm s choice of compensation method piece rates are defined more rigorously among the more important factors discussed are worker heterogeneity incentives sorting considerations monitoring costs and asymmetric information one result is that salary workers tend to be of lower quality and more homogeneous than are their piece rate counterparts numerous additional results are provided helpful comments by victoria lazear and yoram weiss are gratefully acknowledged support was provided by the department of labor and the national science foundation 1 see lazear and rosen 1981 stiglitz 1981 holmstrom 1982 green and stokey 1983 2 see lazear 1979 1981 and harris and holmstrom in press

negotiated measurement rules in debt contracts this paper investigates contractual definitions of net income and net worth and the cross sectional variation in definitions of net income in a large sample of private debt contracts to shed light on the debt contracting demand for accounting numbers the descriptive evidence indicates that removing transitory earnings is one principal concern in the measurement of earnings but not in the measurement of net worth in the extreme contracts are never written on comprehensive income as an earnings concept whereas accumulated other comprehensive income is included in net worth in most contracts in contrast conservative adjustment in the sense of including certain types of negative earnings but not the corresponding positive earnings does not seem to be a primary consideration in measuring net income and net worth cross sectionally i find that net income is more likely to be defined differently from the gaap when net income plays a more important role in a contract when the loan maturity is longer and when transitory earnings are less useful for debt contracting collectively the evidence shows that debt contracting parties choose contracting variables in a manner consistent with efficient contracting and that transitory earnings are relatively less useful in measuring firm performance for debt contracting

informed lending and security design we examine the role of security design when lenders make inefficient accept or reject decisions after screening projects lenders may be either too conservative in which case they reject positive npv projects or too aggressive in which case they accept negative npv projects in the first case the uniquely optimal security is debt in the second case it is levered equity in equilibrium profitable projects that are relatively likely to break even are financed with debt while less profitable projects are financed with equity highly profitable projects are financed by uninformed arm slength lenders professional lenders have specialized expertise in screening projects unlike the typical entrepreneur to whom they lend they have been exposed to a wide variety of projects in the past professional lenders have experienced loan officers and analysts who know precisely what information is relevant how to treat soft information such as management quality and how to weigh the various pieces of information in making a forecast of the project s cash flows and default risk this paper examines how securities should be optimally designed when lenders make inefficient accept or reject decisions after screening projects in our model screening generates an informative albeit private signal about the project s profitability high signals indicate a positive net present value npv and low signals indicate a negative npv where the project s npv is increasing

venture capital investments and the technological performance of portfolio firms what is the relationship between venture capitalists selection of investment targets and the effects of these investments on the patenting performance of portfolio companies in this paper we set out a modelling and estimation framework designed to discover whether venture capital vc increases the patenting performance of firms or whether this effect is a consequence of prior investment selection based on firms patent output we develop simultaneous models predicting the likelihood that firms attract vc financing the likelihood that they patent and the number of patents applied for and granted fully accounting for the endogeneity of investment we find that the effect of vc on patenting is insignificant or negative in contrast to the results generated by simpler models with independent equations our findings show that venture capitalists follow patent signals to invest in companies with commercially viable know how and suggest that they are more likely to rationalise rather than increase the patenting output of portfolio firms

financing and advising optimal financial contracts with venture capitalists this paper analyses the joint provision of effort by an entrepreneur and by an advisor to improve the productivity of an investment project without moral hazard it is optimal that both exert effort with moral hazard if the entrepreneur s effort is more efficient less costly than the advisor s effort the latter is not hired if she does not provide funds outside financing arises endogenously this explains why investors like venture capitalists are value enhancing the level of outside financing determines whether common stocks or convertible bonds should be issued in response to incentives

gender and poverty issues and policies with special reference to asian developing countries abstract recent years saw the outpouring of a theoretical and empirical literature exploring the nexus between gender and poverty in developing countries this paper which provides a critical review of the literature examines the conceptual basis for a gender focused approach to poverty alleviation reviews the relevant empirical studies and data drawn principally but not exclusively from asian developing countries and explores the role of public policies to redress gender disparity the present review argues that the conceptual basis for many gender focused policies is far from well established the empirical foundations of many conventional wisdoms as well as of popular policies remain fragile due to the dearth of reliable gender segregated data and rigorous empirical studies the paper underscores the need for more careful empirical analyses as an input to formulating sound public policy with regard to gender and poverty

capital structure decisions during a firm s life cycle the study reported here examines the financing choices of small and medium sized firms i e those most vulnerable to information and incentive problems through the lens of the business life cycle we argue that the controversy in the empirical literature regarding the determinants of capital structure decisions is based on a failure to take into account the different degrees of information opacity and consequently firms characteristics and needs at specific stages of their life cycles the results show that in a bank oriented country firms tend to adopt specific financing strategies and a different hierarchy of financial decision making as they progress through the phases of their business life cycle contrary to conventional wisdom debt is shown to be fundamental to business activities in the early stages representing the first choice by contrast in the maturity stage firms re balance their capital structure gradually substituting debt for internal capital and for firms that have consolidated their business the pecking order theory shows a high degree of application this financial life cycle pattern seems to be homogeneous for different industries and consistent over time

large risks limited liability and dynamic moral hazard we study a continuous time principal agent model in which a risk neutral agent with limited liability must exert unobservable effort to reduce the likelihood of large but relatively infrequent losses firm size can be decreased at no cost or increased subject to adjustment costs in the optimal contract investment takes place only if a long enough period of time elapses with no losses occurring then if good performance continues the agent is paid as soon as a loss occurs payments to the agent are suspended and so is investment if further losses occur accumulated bad performance leads to downsizing we derive explicit formulae for the dynamics of firm size and its asymptotic growth rate and we provide conditions under which firm size eventually goes to zero or grows without bounds

control rights over intellectual property we consider an incomplete contracting model of bilateral trade in intellectual property ip with sequential investments in its quality and with financial constraints a financially constrained inventor invests in an idea which she then sells to a buyer the buyer in turn invests in developing this idea into a marketable product we propose a novel formulation of ex ante control rights of an ip buyer over the financially constrained ip seller we do not assume alienability of the inventor s ideas the control right is defined as ex ante prescribed prohibition of ex interim financial contracting with third parties we show that such an agreement strengthens the seller s ex ante incentives to invest in the quality of her product which is to be traded at the interim stage the enforcement of this control right is credible or renegotiation proof only for the controlling buyer a downstream user of the ip and not for other potential partners of the seller such as independent venture capitalists we thereby obtain a rationale for a key role of corporate venturing in promoting innovative activities

the bright and dark side of staging investment performance and the varying motivations of private equity firms previous papers that examined investment decisions by private equity funds are divided on whether staging has a positive or negative effect on returns we believe these opposing views can be reconciled by studying when staging is used during the life of the investment relationship we find that staging has a positive effect on investment returns in the beginning of the investment relationship consistent with the notion that staging helps mitigate information asymmetry however staging appears to be negatively associated with returns when used prior to the exit decision our unique dataset allows us to measure these intertemporal effects precisely

the value of creditor control in corporate bonds this paper introduces a measure that captures the premium in bond prices that is due to the value of creditor control we estimate the premium as the difference in the bond price and an equivalent synthetic bond without control rights that is constructed using credit default swap cds contracts we find empirically that this premium increases as firm credit quality decreases and around important credit events such as defaults bankruptcies and covenant violations the increase is greatest for bonds most pivotal to changes in control changes in bond and cds liquidity do not appear to drive increases in the premium

data base for development analysis data base for development analysis an overview the paper provides an overview of the situation with respect to the quality and comparability of data commonly used in development analysis a section each is devoted to a discussion of macroeconomic i e national income and its components savings and investment exports and imports data demography population life expectancy fertility and mortality nutrition and health labour force employment and unemployment poverty and income distribution validation and cross checking of data from different sources the discussion is illustrated with examples drawn mainly from india the paper concludes with a set of recommendations for the improvement of data

losers and winners in economic growth this paper examines the growth rates in 116 economies from 1965 to 1985 it finds that the lowest quintile had an average growth rate of real gross domestic product gdp per capita of 1 3 percent whereas the highest quintile averaged 4 8 percent the authors isolate five influences that discriminate reasonably well between slow and fast growers a conditional convergence effect whereby a country grows faster if it begins with lower real gdp per capita in relation to its initial level of human capital in the forms of educational attainment and health a positive effect on growth from a high ratio of investment to gdp although this effect is weaker than that reported in some previous studies a negative effect from excessively large government a negative effect from government induced distortions of markets and a negative effect from political instability overall the fitted growth rates for eighty five economies for 1965 85 had a correlation of 0 8 with the actual values the authors also find that female educational attainment has a pronounced negative effect on fertility whereas female and male attainment are each positively related to life expectancy and negatively related to infant mortality

the financing of innovation learning and stopping we consider the financing of a research project under uncertainty about the time of completion and the probability of eventual success we distinguish between two financing modes namely relationship financing where the allocation decision of the entrepreneur is observable and arm s length financing where it is unobservable we find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes the rate at which funding is released becomes tighter over time under relationship financing and looser under arm s length financing the tradeoff in the choice of financing modes is between lack of commitment with relationship financing and information rents with arm s length financing

using deferred compensation to strengthen the ethics of financial regulation abstract defects in the corporate governance of government owned enterprises tempt opportunistic officials to breach duties of public stewardship corporate governance theory suggests that incentive based deferred compensation could intensify the force that common law duties actually exert on regulatory managers in principle a forfeitable fund of deferred compensation could be combined with provisions for measuring verifying and rewarding multiperiod performance to make top regulators accountable for maximizing the long run net social benefits their enterprise produces because government deposit insurance enterprises are purveyors of credit enhancements for which private substitute and reinsurance markets exist their performance could be measured accurately enough to make employment contracts for deposit insurance ceos a promising place to experiment with this kind of accountability reform

bidder discounts and target premia in takeovers on news of a takeover the sum of the stock market values of the firms involved often falls and the value of the acquirer almost always does does this mean that takeovers do not raise the values of the firms involved not necessarily we set up a model in which the equilibrium number of takeovers is constrained efficient yet upon news of a takeover a target s price rises the bidder s price falls and most of the time the joint value of the target and acquirer also falls

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

legal framework quality and success of different types of venture capital investments abstract drawing on an analysis of 8 270 companies from 41 countries i explore the relationship between success of venture capital investments and legal frameworks in the investment countries legal framework quality is related to success but the effect varies with the deal type first the significant and positive relationship between legal framework quality and success is more pronounced for domestic deals than for international deals further investigations suggest that international venture capitalists often exit their portfolio companies abroad particularly when these companies are located in countries with inefficient legal frameworks in addition the results lend support to the view that international venture capitalists have a greater experience and reputation second legal framework quality seems to be more important for success in syndicated than in standalone deals this finding supports the view that a sound legal framework may improve the benefit cost balance of syndication while an inefficient legal framework may tend to increase costs in syndicated deals

what do firms disclose and why enforcing corporate governance and transparency in central and eastern europe this version may 10 2005 jel classification codes g15 g18 key words corporate governance ownership concentration transition economics disclosure enforcement site stockholm school of economics the data collection for this paper was financed through the swedish hungarian business research council anete pajuste also acknowledges financial support from cerge ei foundation under a program of the global development network the authors have benefited from comments by stijn claessens colin mayer and participants at the ecgi

can hysteresis explain different labour market operations between europe and the united states this paper offers an analysis of the labour market operation in europe and the united states during 1970 1985 it appears that the labour market developments in europe are more characterized by hysteresis than in the united states simulation results indicate that the unemployment rate in europe would have reached the level of that in the united states in 1985 when wage formation had been more similar

lawyers in venture capital contracting theory and evidence real world financial contracts are sometimes so complex that it can be difficult to understand their exact payoff consequences we develop and test a theoretical model of a venture capitalist vc negotiating with an entrepreneur who may overweigh or underweigh the payoff consequences of contractual downside protection dp a lawyer with expertise in venture capital can inform the entrepreneur about these consequences but less expert but otherwise high quality lawyers cannot we determine how a vc s decision to include dp is affected by the expected quality of the entrepreneur s project the entrepreneur s experience and the vc expertise of his her legal counsel we show that the vc s incentive to include unnecessary dp declines in expected project quality indeed for inexperienced entrepreneurs involved with high quality projects vcs prefer that the entrepreneur s counsel has vc expertise this implies that when negotiating with inexperienced entrepreneurs vcs who invest in high quality companies should be more likely to negotiate with entrepreneurs who employ lawyers with vc expertise we document broad empirical support for the model and provide evidence against competing explanations jel l24 g24 k12 l14 l24

experimentation and project selection screening and learning firms must strike a delicate balance between the exploitation of well known business models and the exploration of risky untested approaches in this paper we study financial contracting between an investor and a firm with private information about its returns from exploration and exploitation the investor optimal mechanism offers contracts with different tolerance for failures to screen returns from exploitation and with different exposure to the project s revenues to screen returns from exploration we derive necessary and sufficient conditions for private information about returns from exploration to have zero value to the firm when these conditions fail private information about exploration may even decrease the firm s payoff

does relationship specific investment depend on asset ownership evidence from a natural experiment in the housing market the classic hold up model grossman and hart 1986 predicts that allocations of asset ownership which expose a party to expropriation reduce relationship specific investments by this party in the empirical context of t he housing market i show that the hold up model predicts more relationship specific investments such as bathroom renovations in owner occupied housing than in rental housing i confirm this prediction for the german housing market to ob tain an exogenous variation of asset home ownership i use the natural experiment of the german reunification under the communist regime ownership exist ed but was economically meaningless it was a quasi random by product of dwelling choice yet after reunification ownership unexpectedly reacquired legal fo rce

small and medium sized enterprises bank relationship strength and the use of venture capital we investigate the nexus between small and medium sized enterprises smes use of venture capital and bank financing relationships using a unique data set with detailed information on sme finance in italy germany and the uk the empirical regularities we uncover show that that entrepreneurial firms substitute venture capital for multiple banking relationships this substitution effect is primarily driven by expertise substitution and there is also some suggestive yet inconclusive indication in the data that smes turn to providers of venture capital to avoid rent extracting behavior by the firm s main bank our results do not support the view that firms obtain venture capital in instances when bank financing is difficult to obtain instead venture capital funds are used if bank funding is deemed not appropriate and firms do seem to be aware of which type of financing is more appropriate for them

saving in developing countries theory and review in the literature on economic development much of the interest in saving has been focused on the relation between saving and growth but saving is not only about accumulation it is about smoothing consumption in the face of volatile and unpredictable income and helping to ensure the living standards of poor people whose lives are difficult and uncertain this paper develops a model of households which cannot borrow but which accumulate assets as a buffer stock to protect consumption when incomes are low such households dissave as often as they save do not accumulate assets over the long term and have on average very small asset holdings but their consumption is markedly smoother than their income much of the evidence is as consistent with this view of saving as it is incosistent with standard views of smoothing over the life cycle and with explanations of the link between saving and growth in terms of life cycle saving behavior consumption smoothing is also a useful way of thinking about government policy where volatility in the world prices of taxed commodities can generate sharp fluctuations in government revenues as well as reallocations of revenue between the private and public sectors many important policy issues in developing countries hinge on issues of consumption and smoothing and research on these issues is currently likely to be more productive than work on the relation between saving and growth

investment incentives debt and warrants abstract this paper models and characterizes investment incentive problems associated with debt financing the decision problem of residual claimants is explicity formulated and their investment policies are characterized the paper also analyzes the use of conversion features and warrants to control distortionary incentives these claims reverse the convex shape of levered equity over the upper range of the firm s earnings and this mitigates the incentive to take risk it is shown that under certain conditions such claims can be constructed to restore net present value maximizing incentives and simultaneously meet the financing requirements of the firm

to steal or not to steal firm attributes legal environment and valuation data on corporate governance and disclosure practices reveal wide within country variation that decreases with the strength of investors legal protection a simple model identifies three firm attributes related to that variation investment opportunities external financing and ownership structure using firm level governance and transparency data from 27 countries we find that all three firm attributes are related to the quality of governance and disclosure practices and firms with higher governance and transparency rankings are valued higher in stock markets all relations are stronger in less investor friendly countries demonstrating that firms adapt to poor legal environments to establish efficient governance practices

incremental impact of venture capital financing this paper investigates the differences in the return generating process of venture capital vc backed firms and their peers that operate without vc financing using a unique hand picked database of 990 vc backed belgian firms and a complete population of belgian small and medium sized enterprises smes we focus on the extent to which the presence of a vc investor affects the sensitivity of a firm s returns to the changes in the capital structure in the operating cycle and in the industry dynamics the differences may stem from the self selection of better companies into vc portfolios from the venture capitalists vcs value adding activities and or from both we examine these factors in the context of a complex simulation procedure which allows separating selection from value adding when traditional approaches are difficult to implement our results indicate that vc backed firms are able to extract more rent from the changing industry conditions and from the optimizations in their capital structure the presence of vcs in the firm s equity seems to have only a marginal effect on the operating cycle efficiency overall the results are suggestive of the value adding being the main driver of the vc backed firm s performance

a theory of debt and equity diversity of securities and manager shareholder congruence this paper shows how the optimal financial structure of a firm complements incentive schemes to discipline managers and how the securities return streams determine the claim holders incentives to intervene in management the theory rationalizes 1 the multipucity of securities 2 the observed correlation between return streams and control rights of securities and 3 the partial congruence between managerial and equity holder preferences over policy choices and monetary rewards as well as the low level of interference of equity in management the theory also offers new prospects for a reappraisal of the earlier corporate finance literature

determinants of household saving in taiwan growth demography and public policy this article examines the determinants of household saving in the process of economic development in the light of the taiwanese experience during the period 1952 99 the methodology involves the estimation of a saving rate function derived within the life cycle framework it is found that the household saving rate rises with both the level and the rate of growth of household disposable income the real deposit rate has a significant positive impact but the magnitude of the impact is modest public saving seems to crowd out private saving but less than proportionately while both old and young dependency in population have a negative impact on the saving rate the magnitude of the impact of the former is far greater than that of the latter increased availability of social security provisions and enhanced credit availability also seem to reduce saving as regards methodological implications the study casts doubt on the usual practice of lumping together public corporate and household savings in savin

default and renegotiation a dynamic model of debt we analyze the role of debt in persuading an entrepreneur to pay out cash e ows rather than to divertthem in the e rstpartof the paper we study the optimal debt contract specie cally the trade off between the size of the loan and the repayment under the assumption that some debt contract is optimal in the second part we consider a more general class of nondebt contracts and derive sufficient conditions for debt to be optimal among these

debt and seniority an analysis of the role of hard claims in constraining management we argue that long term debt has a role in controlling management s ability to finance future investments a company with high widely held debt will find it hard to raise capital since new security holders will have low priority relative to existing creditors conversely for a company with low debt we show there is an optimal debt equity ratio and mix of senior and junior debt if management undertakes unprofitable as well as profitable investments we derive conditions under which equity and a single class of senior long term debt work as well as more complex contracts for controlling investment behavior

optimal design of securities under asymmetric information a firm must decide what security to sell to raise external capital to finance a profitable investment opportunity there is ex ante asymmetry of information regarding the probability distribution of cash flow generated by the investment in this setting we derive necessary and sufficient conditions for a security to be optimal uniquely optimal that is for pooling at this security to be an the unique equilibrium outcome using these conditions we show that the debt contract is uniquely optimal if and only if cash flows are ordered by strict conditional stochastic dominance finally we derive an equivalence relationship between optimal security designs and designs that minimize mispricing