2003. Stage financing and the role of convertible securities
| Venue: | The Review of Economic Studies |
| Citations: | 9 - 0 self |
BibTeX
@ARTICLE{Cornelli_2003.stage,
author = {Francesca Cornelli and Oved Yosha and Kjell Nyborg and Manju Puri and Artur Raviv and Anjolein Schmeits and George Soumelis and Yossi Spiegel and Ian Tonks},
title = {2003. Stage financing and the role of convertible securities},
journal = {The Review of Economic Studies},
year = {},
pages = {32}
}
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Abstract
Venture capital ¯nancing is characterized by extensive use of convertible securities and stage ¯nancing. In a model where an entrepreneur obtains funding for a project from a venture capitalist, we illustrate an advantage of convertible debt over a mixture of debt and equity in stage ¯nancing situations. Essentially, when the venture capitalist retains the option to abandon the project, the entrepreneur has an incentive to engage in window dressing and bias positively the short-term performance of the project, reducing the probability that it will be liquidated. An appropriately designed convertible debt contract prevents such short-termistic behavior since window dressing also increases the probability that the venture capitalist will convert debt into equity.
