An early version of this paper circulated under the title “Optimal Information Revelation by Informed Investors.” Author thanks the co-editor, two anonymous referees, Helmut Bester, Catherine Casamatta, Roman Inderst, Dorothea Schaefer and seminar participants from Bonn, Dortmund, Frankfurt, Mannheim, Munich, and Toulouse. Financial support by the DFG (German Science Foundation) under SFB/TR-15 is gratefully acknowledged.
Entrepreneurial Financing, Advice, and Agency Costs
Version of Record online: 23 JUL 2009
© 2009, The Author(s) Journal Compilation © 2009 Wiley Periodicals, Inc.
Journal of Economics & Management Strategy
Volume 18, Issue 3, pages 845–870, Fall 2009
How to Cite
Strausz, R. (2009), Entrepreneurial Financing, Advice, and Agency Costs. Journal of Economics & Management Strategy, 18: 845–870. doi: 10.1111/j.1530-9134.2009.00231.x
- Issue online: 23 JUL 2009
- Version of Record online: 23 JUL 2009
We develop a model to study the interplay between advice and agency costs in entrepreneurial financing. We demonstrate a tension between the entrepreneur's motivation for effort and the investor's willingness to finance the project. Advice to the entrepreneur exacerbates this tension. Consequently, optimal financing contracts may involve full, partial, or no advice. With partial advice, information flows need to be controlled carefully. Such control is better when advice and finance are integrated as observed by venture capitalists.