ABSTRACT:In view of the allocation of cash flow rights and control rights in venture capital firms, a financing contract model is set up by introducing the entrepreneur’s self-owned capital in this paper. This paper analyzes the affecting factors and mechanism to the allocation of cash flow rights and control rights, shows the relationship between cash flow rights and control rights, gives the bargain intervals of the entrepreneur and the venture capitalist about the allocation of cash flow rights and control rights. It is shown that the more the entrepreneur’s self-owned capital and the higher the venture capitalist’s evaluation of the venture project and the ability of the entrepreneur, the fewer cash flow rights and control rights the venture capitalist will want; the relationship between cash flow rights and control rights of the venture capitalist is complementary but not corresponding, so the result provides a theoretical explanation for Kaplan and Stromberg’s empirical researches about the disproportion between cash flow rights and control rights in venture capital firms.
The document discusses a student research project on the primary market. It provides definitions of the primary market as dealing with the issuance and sale of new securities directly from the issuer to investors. Companies, governments, and public institutions can raise funds through new stock or bond issues in the primary market. The objectives of the study are to understand investor preferences for different sectors/industries, factors affecting decisions in new primary issues, and major information sources for investors. The methodology and findings of the study are also summarized.
Econometrics Analysis of Capital Adequacy Ratios and the Impact on Profitabil...iosrjce
This paper examines the econometrics analysis of capital adequacy ratios and the impact on the
profitability of Commercial Banks in Nigeria from 1980 – 2013. The objective is to investigate whether there is
a dynamic long run relationship between capital adequacy ratios and the profitability of commercial banks.
Time series data were sourced from Stock Exchange factbook and financial statement of quoted commercial
banks and the Johansen co-integration techniques in vector error correction model setting (VECM) as well as
the granger causality test were employed. The study has Return on Asset (ROA), Return on Investment (ROI)
and Return on Equity (ROE) as the dependent variables and the independent variables are Adjusted Capital to
Risk Asset Ratio (ACRR), Capital to Deposit Ratio (CTD), Capital to Net Loans and Advances Ratio (CNLAR),
Capital to Risk Asset Ratio (CRA) and Capital to Total Asset Ratio (CTAR). The empirical result demonstrated
vividly in the models that there is a positive long run dynamic and significant relationship between return on
asset and capital to risk asset ratio and capital to deposit ratio while others are negatively correlated. The
findings also revealed that there is bi-directional causality running from ROA to ACRR and ROA to CNLAR. We
therefore recommend that financial policies should be strengthened to deepen the capital base of Nigerian
Commercial banks to enhance bank profitability and sustain economic growth.
The document discusses Special Purpose Vehicles (SPVs), how they contributed to the 2007 financial crisis, their structure and uses, benefits and risks. Some key points:
- SPVs played a role in securitizing subprime mortgages and fueled the housing bubble. When borrowers defaulted, SPVs couldn't pay investors and banks had to announce losses.
- SPVs are legal entities that hold assets and issue securities to investors. They are used for securitization, financing, risk sharing and raising capital.
- Benefits to sponsoring firms include tax benefits, isolation of risk, and meeting regulatory requirements. Risks include lack of transparency, reputational risk from SPV underperformance
Role of special purpose vehicles is ABS marketfinancedude
Special purpose vehicles (SPVs) play an important role in asset securitization. SPVs are legal entities that hold transferred assets in order to issue securities to investors backed by those assets. For the securitization to be effective, the transfer of assets from the sponsor to the SPV must be considered a "true sale" to keep the SPV off the sponsor's balance sheet. SPVs are structured to be bankruptcy remote from the sponsor to protect investors in case of sponsor bankruptcy. Several legal and regulatory issues surrounding SPVs and securitization must be addressed for these structures to work properly.
This document discusses the requirements for a private investment fund to qualify as a Venture Capital Operating Company (VCOC) under ERISA regulations. Key points:
1) To qualify as a VCOC, a fund must invest at least 50% of its assets in operating companies where it has direct contractual management rights. This includes the right to appoint board members or officers.
2) The fund must also exercise active management rights over at least one operating company as part of its regular business activities.
3) It is best practice for funds to obtain a separate "management rights letter" outlining their management rights for each portfolio investment, even though only 50% require this.
4) The
This document discusses special purpose vehicles (SPVs) used in securitization. It provides details on:
1) The concept and purpose of SPVs, which are established to hold securitized assets separately from the originator in order to provide bankruptcy protection to investors.
2) Examples of SPVs used in different countries, including the roles of Fannie Mae, Freddie Mac, and Ginnie Mae in the US mortgage market, as well as structures used in Argentina and Morocco.
3) The use of SPVs in India and desired characteristics such as bankruptcy remoteness, independent corporate existence, and tax neutrality. It evaluates companies, trusts, and mutual funds as potential SPV structures.
The document discusses a student research project on the primary market. It provides definitions of the primary market as dealing with the issuance and sale of new securities directly from the issuer to investors. Companies, governments, and public institutions can raise funds through new stock or bond issues in the primary market. The objectives of the study are to understand investor preferences for different sectors/industries, factors affecting decisions in new primary issues, and major information sources for investors. The methodology and findings of the study are also summarized.
Econometrics Analysis of Capital Adequacy Ratios and the Impact on Profitabil...iosrjce
This paper examines the econometrics analysis of capital adequacy ratios and the impact on the
profitability of Commercial Banks in Nigeria from 1980 – 2013. The objective is to investigate whether there is
a dynamic long run relationship between capital adequacy ratios and the profitability of commercial banks.
Time series data were sourced from Stock Exchange factbook and financial statement of quoted commercial
banks and the Johansen co-integration techniques in vector error correction model setting (VECM) as well as
the granger causality test were employed. The study has Return on Asset (ROA), Return on Investment (ROI)
and Return on Equity (ROE) as the dependent variables and the independent variables are Adjusted Capital to
Risk Asset Ratio (ACRR), Capital to Deposit Ratio (CTD), Capital to Net Loans and Advances Ratio (CNLAR),
Capital to Risk Asset Ratio (CRA) and Capital to Total Asset Ratio (CTAR). The empirical result demonstrated
vividly in the models that there is a positive long run dynamic and significant relationship between return on
asset and capital to risk asset ratio and capital to deposit ratio while others are negatively correlated. The
findings also revealed that there is bi-directional causality running from ROA to ACRR and ROA to CNLAR. We
therefore recommend that financial policies should be strengthened to deepen the capital base of Nigerian
Commercial banks to enhance bank profitability and sustain economic growth.
The document discusses Special Purpose Vehicles (SPVs), how they contributed to the 2007 financial crisis, their structure and uses, benefits and risks. Some key points:
- SPVs played a role in securitizing subprime mortgages and fueled the housing bubble. When borrowers defaulted, SPVs couldn't pay investors and banks had to announce losses.
- SPVs are legal entities that hold assets and issue securities to investors. They are used for securitization, financing, risk sharing and raising capital.
- Benefits to sponsoring firms include tax benefits, isolation of risk, and meeting regulatory requirements. Risks include lack of transparency, reputational risk from SPV underperformance
Role of special purpose vehicles is ABS marketfinancedude
Special purpose vehicles (SPVs) play an important role in asset securitization. SPVs are legal entities that hold transferred assets in order to issue securities to investors backed by those assets. For the securitization to be effective, the transfer of assets from the sponsor to the SPV must be considered a "true sale" to keep the SPV off the sponsor's balance sheet. SPVs are structured to be bankruptcy remote from the sponsor to protect investors in case of sponsor bankruptcy. Several legal and regulatory issues surrounding SPVs and securitization must be addressed for these structures to work properly.
This document discusses the requirements for a private investment fund to qualify as a Venture Capital Operating Company (VCOC) under ERISA regulations. Key points:
1) To qualify as a VCOC, a fund must invest at least 50% of its assets in operating companies where it has direct contractual management rights. This includes the right to appoint board members or officers.
2) The fund must also exercise active management rights over at least one operating company as part of its regular business activities.
3) It is best practice for funds to obtain a separate "management rights letter" outlining their management rights for each portfolio investment, even though only 50% require this.
4) The
This document discusses special purpose vehicles (SPVs) used in securitization. It provides details on:
1) The concept and purpose of SPVs, which are established to hold securitized assets separately from the originator in order to provide bankruptcy protection to investors.
2) Examples of SPVs used in different countries, including the roles of Fannie Mae, Freddie Mac, and Ginnie Mae in the US mortgage market, as well as structures used in Argentina and Morocco.
3) The use of SPVs in India and desired characteristics such as bankruptcy remoteness, independent corporate existence, and tax neutrality. It evaluates companies, trusts, and mutual funds as potential SPV structures.
through this slide , one can get a brief idea of what securitization is , how it works and the differences between conventional and Islamic securitization .
This document provides an overview of venture capital and its application in Islamic finance. It discusses the venture capital lifecycle including fundraising, investing, and exiting investments. It describes how venture capital funds are typically structured as limited partnerships. When structuring deals, venture capitalists prefer to use preferred stock, convertible preferred stock, or participating convertible preferred stock over common stock alone. Other mechanisms used include vesting of shares and including covenants to protect investors. The document aims to describe how this model could be adapted to comply with Sharia principles.
A special purpose vehicle (SPV) is a company or legal entity formed to fulfill a specific limited use, such as raising funds for a project. SPVs isolate risk and allow sponsors to achieve specific objectives while separating the activity from other business operations. The Indian government proposes establishing an SPV to fund financially viable but difficult to finance infrastructure projects, especially in roads, ports, airports and tourism. The SPV would directly lend longer term debt to eligible projects appraised by banks and financial institutions, supplementing other loans to help implement necessary infrastructure development.
The document provides an overview of the Indian financial system. It discusses that the financial system includes financial intermediaries like banks, mutual funds, and insurance companies; financial markets like money markets, capital markets, and derivatives markets; and financial assets/instruments like equity, debt, and indirect securities. The financial system mobilizes savings from households and channels them to corporations and governments through these various institutions and markets, in order to facilitate capital formation and meet short and long-term financing needs.
Vskills basel iii professional sample materialVskills
Bank regulations are needed to reduce risk in the banking system and promote stability. The Basel Accords established international capital standards to strengthen banks against losses and reduce competitive imbalances. Basel III further advanced these standards to be more risk-sensitive in response to financial innovation and globalization multiplying banking risks. Bank regulations aim to reduce risk exposure for bank creditors, systemic risk from multiple bank failures, criminal misuse of banks, and ensure fair treatment of customers.
Angle Capital How To Rise Early Stage Private Equity Financing (2)Vishweshwar
This document discusses raising early-stage private equity financing through angel investors. It notes that entrepreneurs often turn to angel investors after exhausting their own funds and those of friends and family. While angel capital can be an important source of financing, most entrepreneurs have limited knowledge of the angel market, investment process, and how deals are structured. Private placements, which can include a variety of equity and debt securities, are commonly used to structure angel deals. The document provides an overview of different financing options and considerations for entrepreneurs seeking angel financing.
The document discusses India's Credit Guarantee Scheme for NBFC-MFIs/MFIs (CGSMFI) which provides credit guarantees to lending institutions that provide funding to NBFC-MFIs and MFIs for on-lending to eligible small borrowers during the COVID-19 pandemic. It outlines the key features of the scheme including eligible institutions, guarantee coverage of 75% of loan defaults for up to 3 years, responsibilities of member lending institutions, and eligibility criteria for loans extended to ultimate borrowers. The scheme aims to provide competitive funding to NBFC-MFIs/MFIs to support existing and new micro-enterprises during the pandemic.
1) Non-SLR securities are investments made by banks that are not mandated by statutory liquidity ratio requirements. They include investments in stocks, bonds, mutual funds, commercial paper, and other capital market instruments.
2) These investments carry more risk than SLR investments in government securities but can provide higher returns. Risks include security selection, credit risk, market risk, liquidity risk, and more.
3) Guidelines from the RBI specify limits on non-SLR investments and criteria for eligible securities. Banks must also comply with prudential norms on income recognition, asset classification, and provisioning for these investments.
The important functions of a financial manager include:
1. Providing capital for business operations through programs and maintaining relationships with investors.
2. Managing short-term financing from banks and collections from customers.
3. Planning and controlling business operations through reporting and evaluating performance.
Debentures are debt instruments issued by companies as evidence of debt. Common types include secured/unsecured, convertible/non-convertible, and redeemable/perpetual debentures. Preference shares are hybrid instruments with characteristics of both debt and equity.
The balance sheet shows a company's assets, liabilities, and shareholders' equity on a particular date. Ratio analysis evaluates the financial health and performance of
The document discusses key aspects of company directorship under the Indian Companies Act 2013, including:
1. Directors are appointed by the company's articles, shareholders, existing directors or third parties to manage the company's affairs.
2. Directors must obtain a Director Identification Number (DIN) and can be removed by shareholders, the central government or courts.
3. The document outlines the duties and liabilities of directors, such as ensuring compliance with the company's objectives and applicable laws.
A product to enable life-insurer guaranteed investment contracts for separate accounts to function like money market instruments for sale to longer-term investors; increase spreads by 200-400% for insurers.
Credit rating agencies provide independent credit ratings that assess an entity's ability and willingness to repay debt. The document discusses the origin and importance of credit rating agencies in India, including how they help investors, corporations, and policymakers. It outlines the key factors credit rating agencies consider like debt repayment environment, wealth creation capability, and repayment sources. The three main credit rating agencies in India are CRISIL, ICRA, and CARE, which were established in the late 1980s and 1990s and are regulated by SEBI and RBI. Credit ratings are given for various financial instruments and entities to help with investment decisions and promote financial discipline.
This document provides guidelines and best practices for Islamic venture capital in Malaysia. It outlines core requirements and recommendations. The core requirements are to appoint an independent Shariah adviser and ensure venture company activities are Shariah compliant. The best practices section recommends responsibilities for the Shariah adviser, compliance officer, and portfolio management practices to ensure alignment with Shariah principles. Appendices further define relevant Shariah concepts and criteria for appointing a Shariah adviser.
Special Purpose Vehicals Securitizationfinancedude
Special Purpose Entities (SPEs) are legal entities created for specific purposes in structuring securitization transactions. SPEs are critical components of the $5.2 trillion U.S. securitization market, which provides liquidity to financial institutions and consumers through products like mortgages and credit cards. SPEs hold pools of financial assets, issue securities to investors, and protect investors from bankruptcy risk of the financial institution that established the SPE. Accounting standards require disclosure of risks and obligations associated with SPE transactions, even if the SPE is not consolidated on the financial institution's balance sheet.
The document analyzes whether modern sukuk structures are Shariah compliant. It finds that most sukuk resemble conventional bonds in key ways: distributions are based on interest rates rather than profits; managers promise to loan holders if profits fall below a rate; and managers guarantee to repurchase assets at face value, ensuring return of principal. While incentives can comply with Shariah if based on actual profits, modern sukuk incentives are tied to interest rates. The document concludes most sukuk fail to represent true asset ownership and risk sharing as required by Shariah.
The document is a student's project on loan syndication. It includes a declaration by the student that the information submitted is true and original. It also includes a certificate from the student's project guide. The acknowledgements section thanks various individuals who provided guidance and support. The index lists the contents of the project, which covers topics such as the meaning of loan syndication, the syndication process, reasons for syndicated lending, and the role of parties involved. It also includes an overview of ICICI Bank and its syndication services.
International Journal of Business and Management Invention (IJBMI)inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online
Crisil fund services-wealth-mgmnt-feb11Radhika Khant
- The document discusses the growing mass affluent segment in India and the need for a new paradigm in wealth management to serve this segment.
- The mass affluent segment lacks organized wealth management services to help them achieve financial goals like education, marriage, retirement.
- A new model is needed that involves partnerships between independent financial advisors (IFAs) who understand retail investors, and large institutions that provide infrastructure, research and products. This could provide a cost-effective and trusted platform for wealth management for the mass affluent.
through this slide , one can get a brief idea of what securitization is , how it works and the differences between conventional and Islamic securitization .
This document provides an overview of venture capital and its application in Islamic finance. It discusses the venture capital lifecycle including fundraising, investing, and exiting investments. It describes how venture capital funds are typically structured as limited partnerships. When structuring deals, venture capitalists prefer to use preferred stock, convertible preferred stock, or participating convertible preferred stock over common stock alone. Other mechanisms used include vesting of shares and including covenants to protect investors. The document aims to describe how this model could be adapted to comply with Sharia principles.
A special purpose vehicle (SPV) is a company or legal entity formed to fulfill a specific limited use, such as raising funds for a project. SPVs isolate risk and allow sponsors to achieve specific objectives while separating the activity from other business operations. The Indian government proposes establishing an SPV to fund financially viable but difficult to finance infrastructure projects, especially in roads, ports, airports and tourism. The SPV would directly lend longer term debt to eligible projects appraised by banks and financial institutions, supplementing other loans to help implement necessary infrastructure development.
The document provides an overview of the Indian financial system. It discusses that the financial system includes financial intermediaries like banks, mutual funds, and insurance companies; financial markets like money markets, capital markets, and derivatives markets; and financial assets/instruments like equity, debt, and indirect securities. The financial system mobilizes savings from households and channels them to corporations and governments through these various institutions and markets, in order to facilitate capital formation and meet short and long-term financing needs.
Vskills basel iii professional sample materialVskills
Bank regulations are needed to reduce risk in the banking system and promote stability. The Basel Accords established international capital standards to strengthen banks against losses and reduce competitive imbalances. Basel III further advanced these standards to be more risk-sensitive in response to financial innovation and globalization multiplying banking risks. Bank regulations aim to reduce risk exposure for bank creditors, systemic risk from multiple bank failures, criminal misuse of banks, and ensure fair treatment of customers.
Angle Capital How To Rise Early Stage Private Equity Financing (2)Vishweshwar
This document discusses raising early-stage private equity financing through angel investors. It notes that entrepreneurs often turn to angel investors after exhausting their own funds and those of friends and family. While angel capital can be an important source of financing, most entrepreneurs have limited knowledge of the angel market, investment process, and how deals are structured. Private placements, which can include a variety of equity and debt securities, are commonly used to structure angel deals. The document provides an overview of different financing options and considerations for entrepreneurs seeking angel financing.
The document discusses India's Credit Guarantee Scheme for NBFC-MFIs/MFIs (CGSMFI) which provides credit guarantees to lending institutions that provide funding to NBFC-MFIs and MFIs for on-lending to eligible small borrowers during the COVID-19 pandemic. It outlines the key features of the scheme including eligible institutions, guarantee coverage of 75% of loan defaults for up to 3 years, responsibilities of member lending institutions, and eligibility criteria for loans extended to ultimate borrowers. The scheme aims to provide competitive funding to NBFC-MFIs/MFIs to support existing and new micro-enterprises during the pandemic.
1) Non-SLR securities are investments made by banks that are not mandated by statutory liquidity ratio requirements. They include investments in stocks, bonds, mutual funds, commercial paper, and other capital market instruments.
2) These investments carry more risk than SLR investments in government securities but can provide higher returns. Risks include security selection, credit risk, market risk, liquidity risk, and more.
3) Guidelines from the RBI specify limits on non-SLR investments and criteria for eligible securities. Banks must also comply with prudential norms on income recognition, asset classification, and provisioning for these investments.
The important functions of a financial manager include:
1. Providing capital for business operations through programs and maintaining relationships with investors.
2. Managing short-term financing from banks and collections from customers.
3. Planning and controlling business operations through reporting and evaluating performance.
Debentures are debt instruments issued by companies as evidence of debt. Common types include secured/unsecured, convertible/non-convertible, and redeemable/perpetual debentures. Preference shares are hybrid instruments with characteristics of both debt and equity.
The balance sheet shows a company's assets, liabilities, and shareholders' equity on a particular date. Ratio analysis evaluates the financial health and performance of
The document discusses key aspects of company directorship under the Indian Companies Act 2013, including:
1. Directors are appointed by the company's articles, shareholders, existing directors or third parties to manage the company's affairs.
2. Directors must obtain a Director Identification Number (DIN) and can be removed by shareholders, the central government or courts.
3. The document outlines the duties and liabilities of directors, such as ensuring compliance with the company's objectives and applicable laws.
A product to enable life-insurer guaranteed investment contracts for separate accounts to function like money market instruments for sale to longer-term investors; increase spreads by 200-400% for insurers.
Credit rating agencies provide independent credit ratings that assess an entity's ability and willingness to repay debt. The document discusses the origin and importance of credit rating agencies in India, including how they help investors, corporations, and policymakers. It outlines the key factors credit rating agencies consider like debt repayment environment, wealth creation capability, and repayment sources. The three main credit rating agencies in India are CRISIL, ICRA, and CARE, which were established in the late 1980s and 1990s and are regulated by SEBI and RBI. Credit ratings are given for various financial instruments and entities to help with investment decisions and promote financial discipline.
This document provides guidelines and best practices for Islamic venture capital in Malaysia. It outlines core requirements and recommendations. The core requirements are to appoint an independent Shariah adviser and ensure venture company activities are Shariah compliant. The best practices section recommends responsibilities for the Shariah adviser, compliance officer, and portfolio management practices to ensure alignment with Shariah principles. Appendices further define relevant Shariah concepts and criteria for appointing a Shariah adviser.
Special Purpose Vehicals Securitizationfinancedude
Special Purpose Entities (SPEs) are legal entities created for specific purposes in structuring securitization transactions. SPEs are critical components of the $5.2 trillion U.S. securitization market, which provides liquidity to financial institutions and consumers through products like mortgages and credit cards. SPEs hold pools of financial assets, issue securities to investors, and protect investors from bankruptcy risk of the financial institution that established the SPE. Accounting standards require disclosure of risks and obligations associated with SPE transactions, even if the SPE is not consolidated on the financial institution's balance sheet.
The document analyzes whether modern sukuk structures are Shariah compliant. It finds that most sukuk resemble conventional bonds in key ways: distributions are based on interest rates rather than profits; managers promise to loan holders if profits fall below a rate; and managers guarantee to repurchase assets at face value, ensuring return of principal. While incentives can comply with Shariah if based on actual profits, modern sukuk incentives are tied to interest rates. The document concludes most sukuk fail to represent true asset ownership and risk sharing as required by Shariah.
The document is a student's project on loan syndication. It includes a declaration by the student that the information submitted is true and original. It also includes a certificate from the student's project guide. The acknowledgements section thanks various individuals who provided guidance and support. The index lists the contents of the project, which covers topics such as the meaning of loan syndication, the syndication process, reasons for syndicated lending, and the role of parties involved. It also includes an overview of ICICI Bank and its syndication services.
International Journal of Business and Management Invention (IJBMI)inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online
Crisil fund services-wealth-mgmnt-feb11Radhika Khant
- The document discusses the growing mass affluent segment in India and the need for a new paradigm in wealth management to serve this segment.
- The mass affluent segment lacks organized wealth management services to help them achieve financial goals like education, marriage, retirement.
- A new model is needed that involves partnerships between independent financial advisors (IFAs) who understand retail investors, and large institutions that provide infrastructure, research and products. This could provide a cost-effective and trusted platform for wealth management for the mass affluent.
The document provides an overview of capital structure theories and factors that affect a company's capital structure decisions. It discusses the pecking order theory, trade-off theory, and agency cost theory of capital structure. It also outlines several factors that influence a company's use of debt versus equity, including company size, growth opportunities, profitability, tangible assets, cash flow, taxes, and non-debt tax shields. The document appears to be providing background information on capital structure concepts to support an analysis of capital structure for specific companies.
Different Problem, Same SolutionContract-Specialization in .docxlynettearnold46882
This document discusses a study of venture capital (VC) contracts that finds evidence of "contract-specialization" - that individual VCs tend to reuse familiar contractual terms from past deals rather than finely tailoring each contract. The study analyzes 4,561 VC contracts and finds that VCs restrict choices to a small set of alternatives, with the same exact terms being used in 46% of contracts as one of the previous five. This specialization persists after controlling for characteristics and indicates VCs are reluctant to experiment with unknown combinations due to costs of misunderstanding consequences. The study also finds VCs learn new terms from syndication partners, challenging the premise that each contract is uniquely tailored.
Post privatization Corporate Governance and the challenges of working capital...inventionjournals
The document discusses corporate governance and working capital challenges in Nigeria after privatization. It examines the impact of corporate governance proxies like ownership structure, board characteristics, and privatization on the liquidity ratio of Ashaka Cement Company. Trend analysis found the liquidity ratio was generally higher before privatization but declined significantly at times due to economic issues. Regression analysis suggests some corporate governance factors like minority ownership and privatization had a positive impact on liquidity ratio, while others like non-executive directors and market value had a negative impact. The study concludes corporate governance significantly impacts liquidity ratio but macroeconomic environment also influences company efficiency.
The Impact of Capital Structure on the Performance of Industrial Commodity an...IJEAB
This paper investigates the impact of capital structure on the performance of commodity and service firms listed on the Vietnamese Stock Exchange. Data used in the paper were collected from the 142 firms listed on Ho Chi Minh and Ha Noi Stock Exchange during time 2009-2015. By using the descriptive statistics and linear regression model, the findings shows that there is negative relationship between capital structure (e.i. STD. LTD and DA) and peformance of the firms (i.e. ROE) for the commodity and services firms listed on two given Stock Exchange Market of Vietnam. Following are possible implications for the study.
A Critical Literature Review Of Capital Structure TheoriesDustin Pytko
This document provides a literature review of several major capital structure theories, including:
1) Modigliani and Miller's capital structure irrelevance theory which argues that the value of a firm is independent of its capital structure under certain assumptions.
2) The trade-off theory which suggests firms choose an optimal debt ratio that balances the tax benefits of debt against the costs of financial distress.
3) The pecking order theory which proposes firms prefer internal financing first, then debt, and finally equity to avoid information asymmetry costs.
4) Market timing theory which argues firms take advantage of over/undervaluation when raising capital.
5) Agency cost theory which examines conflicts between shareholders and managers
Relationship between capital structure and firm’s performance theoretical reviewAlexander Decker
This document provides a theoretical review of the relationship between capital structure and firm performance. It begins by defining capital structure as the combination of debt and equity used to finance a firm's operations. The document then discusses the main determinants of capital structure, including both internal factors like firm size, growth, and profitability, as well as external macroeconomic variables. Finally, it outlines the major theories around capital structure and their views on the relationship with firm performance and value.
Financial managers are responsible for investment, financing, and dividend decisions when managing corporate funds. The financing decision addresses how much capital to raise and what the optimal debt-to-equity mix is to maximize firm value. There are two major theories of capital structure: the trade-off theory and pecking order theory. The trade-off theory argues that firms balance tax benefits of debt against bankruptcy costs to determine an optimal debt ratio. The pecking order theory contends that firms prefer internal financing first, then debt, and equity as a last resort, so they do not aim for a target debt ratio. Key differences between the theories include whether firms have a target debt ratio, how profitability affects financing choices, and how well each
Determinants of capital_structure_an_empR Ehan Raja
This document summarizes a research paper that investigates the determinants of capital structure for manufacturing firms in Pakistan. The paper reviews various capital structure theories and identifies firm-specific factors that may influence a firm's debt ratio. An empirical analysis is then conducted using data from 160 Pakistani manufacturing firms to determine which factors, such as profitability, size, liquidity, etc., are significantly related to the debt ratios of these firms. The findings indicate several factors predicted by trade-off theory, pecking order theory, and agency theory help explain the financing behavior of Pakistani firms, suggesting some universal applicability of capital structure models from Western settings.
Contoh Penelitian Tentang Pengaruh Profitabilitas Terhadap Nilai PerusahaanTrisnadi Wijaya
1) The study examines how profitability influences firm value, with capital structure (leverage) as a mediator, and industry type and firm size as moderators.
2) The authors hypothesize that profitability has a positive effect on firm value but a negative effect on leverage. Leverage, in turn, is expected to negatively impact firm value.
3) Industry type and firm size are expected to moderate the relationships between profitability, leverage, and firm value. The study uses data from Taiwanese listed companies to test these hypotheses.
The primary objective of this paper is to determine the relationship between the effects of capital structure and the performance of Microfinance Institutions in Oman. In this research, a questionnaire was used to obtain the results and the qualitative study where the qualitative data was collected through primary date. The target group to answer this questionnaire was from the owners of Microfinance in Oman, and 10 answers were obtained. The results found there is a positive relationship between Capital Structure and Performance of Microfinance. The capital
structure is important in improving the performance of Microfinance and maintaining its proper management. It also leads to improved performance, which results in an increase in profit, the correct management of expenses, and a reduction in losses. Empirical results indicate that effective use and creation of social capital is vital to improving the effects of Microfinance, and Owners of Microfinance should focus more on harmonious social relationships and
deliberately building social capital. Also, provided Microfinance Owners to work on a plan to reduce expenses and increase profitability, as well as recognize the correct management of capital structure. As well as understanding the
structure of capital and the positive impact on the performance of Microfinance.
This document summarizes a study on the determinants of capital structure in Thailand. The study analyzed data on 144 Thai listed companies from 2000 to 2011 to examine how firm-specific factors like size, profitability, asset tangibility, growth opportunities, and volatility influence a company's leverage ratios. The results showed that leverage ratios increased significantly with firm size but decreased significantly with profitability, in line with trade-off and pecking order theories. However, tangibility, growth, and volatility did not have significant relationships with leverage ratios. Therefore, the study concluded that firm size and profitability are the main determinants of capital structure for companies in Thailand.
Study of the Static Trade-Off Theory determinants vis-à-vis Capital Structure...inventionjournals
This paper investigates the application of the Static Trade-Off theory regarding the capital structure of the Pakistani Chemical Industry. We have used panel data analysis for the sample of 31 listed chemical firms from the period 2005 to 2013. The study is unique in its type as unlike to Shah & Hijazi (2005) who studied many industrial sections, this study only focuses on the listed Chemical Firms. We used five independent variables such as Profitability (P), Tangibility (T), Liquidity (L), Firm Size (FS) and Total Assets Growth (TAG) to study the effect on independent variable Financial Leverage (FG). The results confirmed the relationship of Profitability, Liquidity and Firm Size. However the results were not confirmed for Tangibility and Firm Assets Growth. Even though the results for Tangibility were positive, however the significance of the coefficients failed to support the hypothesis. This study hold a unique position for researchers for future research and also has significance for the investors helping them to make wise investment decisions when investing in Pakistani Chemical Industry since this industry holds a major portion of industrial GDP of the country
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Research on Model of the Financing Contract by Introducing the Entrepreneur’s self-owned Capital
1. International Journal of Humanities and Social Science Invention
ISSN (Online): 2319 – 7722, ISSN (Print): 2319 – 7714
www.ijhssi.org Volume 4 Issue 1 ǁ January. 2015 ǁ PP.16-27
www.ijhssi.org 16 | Page
Research on Model of the Financing Contract by Introducing the
Entrepreneur’s self-owned Capital
ZHAO YuanJun
Glorious Sun School of Business and Management Donghua University
Shanghai China
200051
ABSTRACT:In view of the allocation of cash flow rights and control rights in venture capital firms, a financing
contract model is set up by introducing the entrepreneur’s self-owned capital in this paper. This paper analyzes
the affecting factors and mechanism to the allocation of cash flow rights and control rights, shows the
relationship between cash flow rights and control rights, gives the bargain intervals of the entrepreneur and the
venture capitalist about the allocation of cash flow rights and control rights. It is shown that the more the
entrepreneur’s self-owned capital and the higher the venture capitalist’s evaluation of the venture project and
the ability of the entrepreneur, the fewer cash flow rights and control rights the venture capitalist will want; the
relationship between cash flow rights and control rights of the venture capitalist is complementary but not
corresponding, so the result provides a theoretical explanation for Kaplan and Stromberg’s empirical researches
about the disproportion between cash flow rights and control rights in venture capital firms.
KEYWORDS: Venture Capital Firms; Financing Contract; Self-Owned Capital; Cash Flow Rights; Control
Rights
I. INTRODUCTION
At the beginning of the founding of a venture capital firm, the entrepreneur (hereinafter referred to as
EN) usually has only human capital such as patents, proprietary technology and insufficient self-owned capital.
Therefore, the venture capital is extremely important resource for the new entrepreneurial firm. In order to get
venture capital, The EN may conceal unfavorable information on his own, leading the venture capitalist
(hereinafter referred to as VC) to face high uncertainty of the new entrepreneurial firm, high asymmetric
information and other issues in investment, this is bound to affect the financing success rate. How to design
rational and effective venture capital financing contract, to attract and motivate the VC’s capital are the
problems to be solved in the entrepreneurial process for the venture capital firm.The core problem of the venture
capital firm is the allocation of cash flow rights and control rights [1,2]. The former is the ultimate goal of the
VC’s investment, the latter is a security system which helps the VC to get cash flow rights safely, the allocation
of these two rights are decided by the purposes of both investment and financing involvements. In the beginning,
facing wealth constraints, besides allocating corresponding cash flow rights to the VC, the EN must actively
relinquish part of control rights to the VC in order to attract the VC’s capital (though this may reduce the EN’s
own private benefits), this is actually the signal about project quality the EN passes to the VC by transfer of
control rights [3];
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The purpose of the VC investment the venture capital firm is to obtain high capital benefits, but he also
faces high risks. Therefore, in addition to requiring some cash flow rights, he will also ask for part of control
rights to control the risks due to asymmetric information to a certain degree.Aghion and Bolton [1] discussed the
allocation of enterprise rights between the EN and the VC when the EN in the case of wealth constraint. They
believed that control rights is an integrated whole, can only be wholly owned or completely transferred by one
party. Dewatripont and Tirole [3] thought that in the venture capital financing contract of the venture capital
firm, the only performance-based monetary incentives (cash flow rights) are far from enough for the VC, giving
the VC a certain degree of control rights must be taken into consideration, and the reason of the VC using
control rights to intervene the management of the venture capital firm is derived from cash flow rights given by
venture capital financing contract. Berglof [4] considered that when the situation of the venture capital firm is
good, the VC will own all of the cash flow rights, and the EN have control rights, in this way, the EN can obtain
compensation for his private benefits when bargaining with the new buyer in the future; when the condition of
venture capital firms is not good, then the VC will have control rights, he can get corresponding compensation
through the equity dilution which resulted from the new buyer’s intervening the company.
Kaplan and Stromberg’s empirical researches show [5]: cash flow rights are disproportionate with
control rights in the venture capital firm, and their researches also confirmed Berglof’s theoretical findings.
Based on the study of Aghion and Bolton, Hellmann [6] discussed under what circumstances is the EN willing
to take the initiative to transfer control rights to the VC. His conclusion is: at the beginning of the founding of an
entrepreneurial firm, facing wealth constraints, the EN had to balance between equity and control rights, and in
order to obtain relatively more equity, the EN will give up some control rights. Gebhard and Schmidt [7]
combined the allocation of control rights in the venture capital firm and financial instruments to discuss the
allocation of control rights and the investment efficiency of the firm when the VC uses the three different
financial instruments, that is, debt, equity and convertible debt. In their model, cash flow rights and control
rights of the venture capital firm are combined through financial contracts, which provide a way of thinking on
the study of corporate governance efficiency from the perspective of venture capital financing contracts.In
recent years, some Chinese scholars also aimed at the allocation of rights in the optimal venture capital
financing contract. An shi and Wangjian [8,9] studied the problems such as control rights’ allocation, transfer
and structure in venture capital financing contracts. Based on Aghion and Bolton’s researches [1], Yan zhi-xiong
and Fei fang-yu [10] used the incomplete contract theory to discuss the three forms of the allocation of control
rights in venture capital financing contract: entrepreneurs’ control, contingent control and investors control.
Furthermore, they analyzed the problems of financing conditions and the allocation of profits in these cases.
Wang lei and Dang xing-hua [11] built the dynamic game model of the structure of control rights in venture
capital backed new high-tech firms, compared the applicable conditions of contingent control and joint control,
and analyzed the influence factors of the structure of control rights in venture capital firms. Wang sheng-cou and
Zeng yong [12] applied the framework of incomplete contracts analyzing the allocation of liquidation rights,
replacement rights and convertible securities in venture capital firms. They show that the conflicts of interest
between the VC and the EN can be resolved through the combination of convertible securities and liquidation
rights and replacement rights. Li jian-jun and Fei fang-yu [13] considered the VC can implement the effective
ex-post control by the convertible preferred equity, and cash flow rights from the convertible preferred equity
are the efficient implementation mechanisms for the VC’s ex-ante control rights.
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Wu bin and Huang ming-feng [14] choose 168 venture capital firms which are from 2006-2008
Shenzhen small and medium sized listed companies, to testify the influences on the allocation of control rights
based on firms’ performance and characteristics of human resources. The results show there is a negative
correlation between the shares proportion of venture capital and firms’ performance; there is a negative
correlation between the allocation of control rights and the level of senior managers’ education.However, the
existing researches ignored that the EN’s self-owned capital may affect the allocation of cash flow rights and
control rights at the beginning of the founding of venture capital firms; and they can't prove Kaplan and
Stromberg’s [5] empirical results that controls rights are disproportionate with cash flow rights in venture capital
firms. Because the allocation of cash flow rights and control rights is sure to be influenced by the EN’s initial
wealth, therefore, we will do a further research on the allocation of cash flow rights and control rights in venture
capital financing contract based on introducing the EN’s self-owned capital, hoping it can endogenously explain
the relationship between the two kinds of rights and the mechanism which influences the allocation of the two
kinds of rights.
II. THE MODEL OF THE FINANCING CONTRACT
The Assumptions of the Model
Assuming that at the beginning of the founding of a venture capital firm, the EN exclusively has an innovative
project that requires an initial capital , and the EN has the self-owned capital ;
The EN offers a financing contract to the VC who is risk neutral, expecting to get venture
capital . Suppose the VC thinks the probability that the EN is high ability
is , and thinks the probability that the project is good idea is . Because
of the asymmetric information and the overconfidence of the EN [15], the EN is more optimistic than the VC in
the judgments of the quality of the project and his ability. Therefore, suppose the EN thinks the probability that
he is high ability is , and thinks the probability that the project is good idea
is . Suppose The VC finances the project with the combination of debt and equity
[16,17], including debt capital is , equity capital is ,
obviously . Assuming the risk-free interest rate is
, after the negotiation between the EN and the VC, the EN offers the debt capital
interest to VC, and the VC gets the equity claim .
As the venture capital firm has the features of high risk, high uncertainty and so on, when the financing contract
is signed, the VC will ask to get some control rights to conduct supervision and management over the firm, in
this way to control the investment risks as much as possible, and the EN is also willing to relinquish part of
control rights to the VC, because the transfer of part of control rights can weaken the VC’s participation
conditions.
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Reference to Tirole’s point of view [18], we assume that the proportion of control rights that the EN relinquishes
to the VC is in the initial financing contract. Dyck and Zingales [19], Hellmann [6], Dessí [20]
thought that the benefits of control rights are existed in the process of investment, they can be divided into the
monetary benefits of control rights and the non-monetary benefits of control rights. The non-monetary benefits
of control rights, that is to say, the private benefits are only owned by the EN. For the above reasons, we assume
that when the EN gets all control rights, his private benefits are , and when the EN relinquishes
part of control rights to the VC, his private benefits will be reduced to .
To succeed in the venture capital firm, it must be built on a combined basis which includes the innovative
projects, the excellent business and management talents. Therefore, suppose the firm can be successful if and
only if the project is a good idea and the EN is of high ability. If the venture capital firm is ultimately successful,
the income will be ; if there is any bad signal about performance in the implementation
process, the VC will use his control rights to liquidate the venture capital firm, the purpose of doing that is to
protect his own investments through control rights, thereby reducing his investment risks. The VC’s control
rights will affect the final liquidation value of the venture capital firm, specifically, when liquidation happens,
the more control rights the VC owns, the greater the protective effect will be over the investment. In order to
simplify the calculation, we assume the liquidation value of the venture capital firm
is when the project fails.
Arrangement of the Liquidation Preference : When the project fails, the arrangement of the liquidation
preference is the first issue to be resolved in the initial financing contract. As the VC invested debt capital x to the
firm, when the liquidation value of the venture capital firm satisfies , the VC is clearly has
the liquidation preference. Therefore, in order to make the discussion meaningful, we further assume that: If the
project fails, the liquidation value of the venture capital firm satisfies . The paper is to discuss the
arrangement of the liquidation preference from the following two cases.
1) The VC has the liquidation preference.
Under this circumstance, when the venture capital firm is liquidated, we suppose the contract offers the debt
capital interest to the VC, then, the expected utilities of the VC and the EN are given by:
(1)
(2)
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2) The EN and the VC all have the liquidation preference.
Under this circumstance, when the venture capital firm is liquidated, we suppose the contract offers the debt
capital interest r2 to the VC, then, the expected utilities of the VC and the EN are given by:
(3)
(4)
In order to analyze the EN how to allocate the liquidation preference in the financing contract, we only need to
compare the influences of two liquidation rights’ allocation strategy over the EN’s expected utility. To do this,
we calculate:
(5)
When the EN offers financing contract to the VC, he only needs to satisfy the VC’s participation conditions. So,
we get the following and r2 by letting and ,
(6)
(7)
Using (5), (6) and (7) we have:
(8)
We get the following Result 1 from (8).
Result 1: At the beginning of the founding of the venture capital firm, despite the EN has invested his
self-owned capital, when the project fails, the EN will benefit from his own proceeding, voluntarily relinquish
the liquidation preference to the VC.
In fact, by comparing (6) with (7), we have
(9)
Therefore, when the innovation project fails, the EN will initiatively take the strategy of relinquishing the
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liquidation preference to the VC. This strategy provides protection for the VC’s venture capital to some extent,
attracting the VC’s venture capital, making the debt capital interest the VC requires be reduced, thereby
reducing the financing costs of the venture capital firm.
The Participation Conditions of the EN and the VC : According to the Result 1, the participation condition that
the EN will look for venture capital and start the innovative project is given by
(10)
The participation condition that the VC will invest his venture capital to the venture capital firm is given by
(11)
From (10), We have:
(12)
(13)
(14)
From (11), We have:
(15)
(16)
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(17)
According to the analysis of the participation conditions of the EN and the VC, we get the intervals about the
allocation of cash flow rights and control rights.
The financing of the venture capital firm may succeed
if , , . In fact, the three intervals are the
bargain intervals about the allocation of cash flow rights and control rights in the initial financing contract, if the
VC and the EN negotiate according to the three intervals, the allocation of cash flow rights and control rights
may be resolved.
The Analysis of Affecting Factors : We have proposed the bargain intervals about the allocation of cash flow
rights and control rights in Section 2.3; next, we will discuss the factors that affect boundaries of these intervals.
Firstly, we will analyze the factors that affect the EN’s financing strategy.
From (12), we will get , so, we have the following Result 2.
Result 2:
1) The more self-owned capital the EN invests, the less debt capital interest he is willing to relinquish to the VC;
2) The more control rights the VC gains, the less debt capital interest the EN is willing to relinquish to the VC.
From (13), we will get , so, we have the following Result 3.
Result 3:
1) The more self-owned capital the EN invests, the less equity claim he is willing to relinquish to the VC;
2) The more control rights the VC gains, the less equity claim the EN is willing to relinquish to the VC.
From (14), we will get , , , so,
we have the following Result 4.
Result 4:
[1]. The more self-owned capital the EN invests, the less control rights he is willing to relinquish to the VC;
[2]. The more equity claims the VC gains, the less control rights the EN is willing to relinquish to the VC;
[3]. The more debt capital interests the VC gains, the less control rights the EN is willing to relinquish to the
VC;
[4]. The higher the EN estimates the possibility of the new entrepreneurial firm’s success, the more control
rights he is willing to relinquish to the VC.
From Results 2 to 4, we know that at the beginning of the founding of the venture capital firm, if the
more self owned capital the EN invests, then he is more reluctant to relinquish more cash flow rights and control
rights to the VC. In other words, if the EN’s wealth constraint is serious, then he is willing to relinquish the VC
8. Research On Model Of The Financing Contract…
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more cash flow rights or control rights in order to attract the VC’s investment of venture capital. In addition, the
relationship between cash flow rights and control rights that the EN is willing to relinquish to the VC is
complementary, specifically, the more control rights the EN is willing to relinquish to the VC, the less cash flow
rights the EN is willing to relinquish to the VC. In particular, if the higher the EN evaluates his creativity and
ability ( are larger), then the more he will believe that he has the ability of making the venture capital
firm successful. Therefore, the EN is willing to relinquish the VC more control rights, such a strategy can
reduce the VC’s concern of investment risks, which to some extent, reduce the VC’s requirements of cash flow
rights, and the EN can get more monetary return. It can explain that in the venture capital practice, why those
EN who have full confidence of their own creativity and ability are willing to give the VC more control rights to
supervise themselves, but are very stingy in terms of relinquishing the cash flow rights.
Next we analyze the factors that affect his investment strategies from the VC’s viewpoint (note ).
From (15), we get , (see the Appendix), so, we
have the following Result 5.
Result 5:
[1]. The more self-owned capital the EN invests, the less debt capital interest the VC is going to require;
[2]. The more control rights the VC gains, the less debt capital interest he is going to require;
[3]. The higher the VC estimates the possibility of the venture capital firm’s success, the less debt capital
interest he is going to require.
From (16), we will get , (see the Appendix),
so, we have the following Result 6.
Result 6:
[1]. The more self-owned capital the EN invests, the less equity claim the VC is going to require;
[2]. The more control rights the VC gains, the less equity claim he is going to require;
[3]. The higher the VC estimates the possibility of the venture capital firm’s success, the less equity claim he is
going to require.
From (17), we will get
, , , (see the Appendix), so,
we have the following Result 7.
Result 7:
[1]. The more self-owned capital the EN invests, the less control rights the VC is going to require;
[2]. The more equity claims the VC gains, the less control rights he is going to require;
[3]. The more debt capital interests the VC gains, the less control rights he is going to require;
[4]. The higher the VC estimates the possibility of the venture capital firm’s success, the less control rights he
is going to require.
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From Results 5 to 7, we know that at the beginning of the founding of the venture capital firm, if the more
self-owned capital the EN invests, the higher the VC estimates the possibility of the venture capital firm’s
success, then the VC is likely to reduce his requirements of gaining cash flow rights or control rights. In other
words, if the EN’s wealth constraint is serious, or the VC’s expectation of the venture capital firm’s success is
not high, then the VC is willing to invest his venture capital on the basis of gaining more cash flow rights or
control rights. In addition, the relationship between cash flow rights and control rights the VC requires is
complementary, specifically, the more cash flow rights (or control rights) the VC requires, the less control rights
(or cash flow rights) he will gain.
IV. THE ANALYSIS OF THE RESULTS
From the discussion in the Section 2.4, we conclude the self-owned capital the EN invested at the
beginning of the founding of the venture capital firm and the VC’s judgments on the possibility of the firm’s
success are two important factors that will affect the allocation of cash flow rights and control rights in the
venture capital financing contract. In fact, the self-owned capital the EN invested at the beginning of the
founding of the venture capital firm has two effects: first, passing on the quality signal about the venture
projects [21], and second, to a certain extent, guaranteeing the venture capital the VC invested. If the self-owned
capital the EN invested at the beginning of the founding of the venture capital firm is relatively more, then the
guaranteeing role is large and will reduce the VC’s investment risks, therefore, cash flow rights and control
rights the VC requires will be relatively less. Based on the above analysis, we argue that the most important role
of the EN’s self-owned capital is to weaken the VC’s participation conditions. However, the more the EN’s
self-owned capital invested the greater risks he will face. In view of this, at the beginning of the founding of the
venture capital firm, the EN will balance the role of security and risks from his self-owned capital to choose the
optimal amount of self-owned capital.
On the other hand, only in the case when the venture project is a good idea, and the EN is of high capacity,
starting the project can have the chance to be successful. Therefore, if the VC’s evaluation on the venture
project’s creativity and the EN’s ability is high, then the VC will estimate that the possibility of the EN’s
effectively managing the venture capital firm and making the firm successful is high, which can reduce
investment risks, the VC will correspondingly reduce the interference in business activities of the firm or the
requirements of cash flow rights. This result is in match with the actual practice in venture capital, before
making investment decisions, the VC will, in particular, examine the potential market competitiveness of the
venture capital firm’s innovative projects and the human capital such as the personnel ability of the corporate
management, such a review process aims at effectively control the investment risks.The traditional firm theory
holds the view that cash flow rights and control rights of an enterprise are corresponding, having more control
rights equals to get more cash flow rights. However, our theoretical study shows that in the field of venture
capital, cash flow rights and control rights the VC gained are in a complementary rather than a corresponding
relationship. To some extent, the research validates Kaplan and Stromberg’s empirical results about the
disproportion between cash flow rights and control rights in venture capital firms. Therefore, in venture capital
firms, the separation characteristics of cash flow rights and control rights are significantly different from the
allocation characteristics in traditional firms.
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III. CONCLUSIONS
At the beginning of the founding of a venture capital firm, in order to solve the financing problems, the
EN will attract the VC’s capital investment through some incentives such as by providing some of his
self-owned capital. Therefore, we include the EN’s self-owned capital into the financing contract of the venture
capital firm, and on this basis, study the allocation of cash flow rights and control rights in the venture capital
firm. The results show that:
1) At the beginning of the founding of a venture capital firm, the self-owned capital the EN invests, the EN and
the VC’s judgments of the firm’s success possibility will affect the allocation of cash flow rights and control
rights in venture capital financing contract. Specifically, the more self-owned capital the EN invests, the less
cash flow rights and control rights the VC will require, that is to say, the EN’s self-owned capital is able to
weaken the VC’s participation conditions, this is helpful for realizing the EN’s financing target; if the higher the
VC evaluates the project’s creativity and the EN’s ability, then the less cash flow rights and control rights the
VC will require, that is to say, the creative venture projects and the EN who is of high capacity are easy to get
support from venture capital; if the higher the EN assesses his creativity and ability , then he is willing to
relinquish relatively more control rights to the VC, but will correspondingly reduce the relinquishment of cash
flow rights.
2) At the beginning of the founding of a venture capital firm, cash flow rights and control rights the VC gains
are complementary. Specifically, the more cash flow rights (or control rights) the VC requires, then the less
control rights (or cash flow rights) he will gain.
In the venture capital financing contract, the allocation of cash flow rights and control rights should be the
outcome of the negotiation between the VC and the EN. Therefore, the three bargain intervals of the EN and the
VC about the allocation of cash flow rights and control rights are derived out in this paper.When signing the
contract, if the VC and the EN negotiate according to the three intervals, the allocation of cash flow rights and
control rights will be effectively resolved.
We are mainly aiming at studying the allocation of cash flow rights and control rights at the beginning of the
founding of venture capital firms. Another important feature of venture capital is stage investment, with the
signals which are related to the management process of the venture capital firm revealed, the EN and the VC
will renegotiate about the allocation of cash flow rights and control rights based on the new information
obtained [22]. Therefore, the dynamic allocation of cash flow rights and control rights in venture capital firms
need in-depth researches in the future.
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Appendix
Proof of , , .
Proof: From (15), (16) and (17), we have
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Because , , we therefore obtain
, .
From Equation (11), we obtain
Obviously, , we therefore
obtain .