TY - JOUR
T1 - Stage financing and the role of convertible securities
AU - Cornelli, Francesca
AU - Yosha, Oved
N1 - Funding Information:
Acknowledgements. The authors thank Giacinta Cestone, Leonardo Felli, Harry Friedman, Martin Hellwig, Ronen Israel, Matthew Jackson, Josh Lerner, Kjell Nyborg, Manju Puri, Artur Raviv, Anjolein Schmeits, George Soumelis, Yossi Spiegel, Ian Tonks, David Webb, Josef Zechner, three anonymous referees, Mark Armstrong (the editor) and participants at various seminars and conferences for helpful comments and suggestions. Edith Sand provided excellent research assistance. We thank the Institut de Analisi Economica (F. Cornelli), the London Business School (0. Yosha), and IGIER (both authors) for their hospitality. The project was supported by an LBS Research Fellowship grant and a CIBER Faculty Research grant.
PY - 2003/1
Y1 - 2003/1
N2 - Venture capital financing is characterized by extensive use of convertible securities and stage financing. In a model where a venture capitalist provides staged financing for a project, we illustrate an advantage of convertible debt (or warrants) over a mixture of debt and equity. Essentially, when the venture capitalist retains the option to abandon the project, the entrepreneur has an incentive to engage in window dressing and bias positively the short-term performance of the project, reducing the probability that it will be liquidated. An appropriately designed convertible security prevents such behaviour because window dressing also increases the probability that the venture capitalist will exercise the conversion option becoming the owner of a substantial fraction of the project's equity.
AB - Venture capital financing is characterized by extensive use of convertible securities and stage financing. In a model where a venture capitalist provides staged financing for a project, we illustrate an advantage of convertible debt (or warrants) over a mixture of debt and equity. Essentially, when the venture capitalist retains the option to abandon the project, the entrepreneur has an incentive to engage in window dressing and bias positively the short-term performance of the project, reducing the probability that it will be liquidated. An appropriately designed convertible security prevents such behaviour because window dressing also increases the probability that the venture capitalist will exercise the conversion option becoming the owner of a substantial fraction of the project's equity.
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U2 - 10.1111/1467-937X.00235
DO - 10.1111/1467-937X.00235
M3 - Article
AN - SCOPUS:0037237268
SN - 0034-6527
VL - 70
SP - 1
EP - 32
JO - Review of Economic Studies
JF - Review of Economic Studies
IS - 1
ER -