Adverse Selection, Investor Experience and Security Choice in Venture Capital Finance: Evidence from Germany


  • The authors gratefully acknowledge funding from the German Research Foundation and the Institute of Banking and Banking Law, University of Cologne. For valuable comments, we are grateful to Donald Flag, Rajdeep Sengupta, and participants of the Academy of Economics and Finance 2008 in Nashville, the Eastern Finance Association Meeting 2008 in St. Pete Beach, and the Midwest Finance Association Meeting 2008 in San Antonio. Further, we have especially benefited from the comments of participants at the European Financial Management Symposium 2010 in Montreal, Canada. We also owe special thanks to an anonymous referee, Douglas Cumming and the Editor John Doukas for very helpful comments and insightful suggestions. *Correspondence: Soenke Sievers.


This article analyses 336 German venture capital transactions from 1990 to 2005 and seeks to determine why selected financial securities differ across deals. We find that a broad array of financial instruments is used, covering straight equity, mezzanine and debt-like securities. Based on the chosen financial securities’ upside potential and downside protection characteristics, we provide an explanation for the differing use of these securities. Our results show that investors’ deal experience, adverse selection risks and economic prospects in the public equity market influence the selection of financial securities.