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RFS Advance Access originally published online on October 14, 2006
Review of Financial Studies 2007 20(4):1289-1325; doi:10.1093/rfs/hhl038
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Copyright © The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies.

Financing a Portfolio of Projects

Roman Inderst
London School of Economics and CEPR

Holger M. Mueller
New York University and CEPR

Felix Münnich
Boston Consulting Group

Address correspondence to Holger M. Mueller, Department of Finance, Stern School of Business, 44 West Fourth Street, Suite 9-190, New York, NY 10012 e-mail: hmueller{at}stern.nyu.edu

JEL: G24, G31


  Abstract

This article shows that investors financing a portfolio of projects may use the depth of their financial pockets to overcome entrepreneurial incentive problems. Competition for scarce informed capital at the refinancing stage strengthens investors' bargaining positions. And yet, entrepreneurs' incentives may be improved, because projects funded by investors with "shallow pockets" must have not only a positive net present value at the refinancing stage, but one that is higher than that of competing portfolio projects. Our article may help understand provisions used in venture capital finance that limit a fund'sinitial capital and make it difficult to add more capital once the initial venture capital fund is raised.

We thank an anonymous referee, the editor (Bob McDonald),and seminaraudiences at the London School of Economics and the First RICAFE Conference on Risk Capital and the Financing of EuropeanInnovative Firms for comments. Inderst and Münnich acknowledge financial support from the Financial Markets Group (FMG).


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