Product Market Competition and the Financing of New Ventures
نویسندگان
چکیده
This paper examines the interaction between venture risk, product market competition and entrepreneurs choice between bank nancing and venture capital (VC) nancing. Under bank nancing, a debt-type contract emerges as optimal, which allows the entrepreneur to retain full control of the venture and thus yields strong e¤ort incentives, as long as she can service the debt repayment; but leads to liquidation in case of default, making the ventures success quite sensitive to exogenous, even temporary shocks that may hinder debt repayment. Under VC nancing an equity-type contract emerges as optimal, which is not sensitive to exogenous shocks, but requires the entrepreneur to share a fraction of the rents with the nancier, thus yielding lower e¤ort incentives for the entrepreneur. There exists a threshold level of venture risk such that bank nancing is optimal if and only if venture risk is below that threshold. Product market competition increases the value of stronger entrepreneurial incentives, and thus increases the maximum level of risk the entrepreneur is willing to take before switching from bank nancing to VC nancing. This is a robust result that is shown to hold in various models of competition, including Hotelling, Salop, DixitStiglitz, Cournot-to-Bertrand switch. Bettignies: Queens School of Business, Queens University, Kingston, Ontario K7L 3N6, Canada. Tel: 613-5336343. Email: [email protected]. Duchêne: Lebow School of Business, Drexel University, Philadelphia, PA 19104-2875, USA. Tel: 215-895-6990. Email: [email protected]. yWe thank Ingela Alger, Patrick Bolton, Gilles Chemla, Jean Dermine, Landis Gabel, Bob Gibbons, Denis Gromb, Thomas Hellmann, Martin Holmen, Rich Mathews, Joel Peress, Antoine Renucci, Joel Shapiro, Lars Stole, Tim Van Zandt, Jano Zabojnik, and seminar participants at Carleton University, Copenhagen Business School, European University Institute, Hitotsubashi University, INSEAD, Queens University, Université Paris-Dauphine, University of Melbourne, University of Ottawa, University of Tokyo, the IIOC 2009 (Boston), the EFMA Meetings 2009 (Milan), and the Conference on Entrepreneurship and Finance 2013 (Lund), for helpful comments. Jing Liang provided excellent research assistance. Bettignies gratefully achnowledges nancial support from SSHRC.
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ورودعنوان ژورنال:
- Management Science
دوره 61 شماره
صفحات -
تاریخ انتشار 2015