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Banks versus venture capital when the venture capitalist values private benefits of control

Barlo, Mehmet and İnci, Eren (2010) Banks versus venture capital when the venture capitalist values private benefits of control. [Working Paper / Technical Report] Sabanci University ID:SU_FASS_2010/0003

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Abstract

If control of their firms allows entrepreneurs to derive private benefits, it also allows other controlling parties. Private benefits are especially relevant for venture capitalists, who typically get considerable control in their portfolio firms, but not for banks, which are passive loan providers. We incorporate this difference between banks and venture capital and analyze entrepreneurs' financing strategy between the two. We find that, in all strict Nash Equilibria, entrepreneurs who value private benefits more choose banks while the rest choose venture capital. Thus, bank-financed entrepreneurs allocate more resources to tasks that yield private benefits while VC-backed entrepreneurs have higher profitability.

Item Type:Working Paper / Technical Report
Subjects:H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
ID Code:14543
Deposited By:Eren İnci
Deposited On:30 Sep 2010 16:42
Last Modified:30 Sep 2010 16:42

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