RFS Advance Access originally published online on August 28, 2008
Review of Financial Studies 2008 21(5):1947-1982; doi:10.1093/rfs/hhn072
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Contracts and Exits in Venture Capital Finance
Schulich School of Business, York University
Send correspondence to Douglas Cumming, Schulich School of Business, York University, 4700 Keele Street, Toronto, Ontario M3J 1P3, Canada. Telephone: 1-416-736-2100 Ext. 77942; Fax: 1-416-736; e-mail: Douglas{at}Cumming.com.
JEL Classification: G24, G32, G33, G34
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Abstract |
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Using a sample of European venture capital (VC) investments, I study the relation between VC contracts and exits. The data indicate that ex ante, stronger VC control rights increase the likelihood that an entrepreneurial firm will exit by an acquisition, rather than through a write-off or an IPO. My findings are robust to controls for a variety of factors, including endogeneity and cases in which the VC preplans the exit at the time of contract choice. My findings are consistent with control-based theories of financial contracting, such as Aghion and Bolton (1992).
I am particularly indebted to Robert McDonald (the Editor) and to an anonymous referee for very helpful comments and suggestions. I owe special thanks to the investors for providing the data, and Sofia Johan, Jan Peter Kooiman, Enrico Perotti, Ibolya Schindele, and Robert Westenberg for their helpful support. I received helpful comments and suggestions from Patrick Bolton, Ronald Masulis, Peter Swan, Li Anne Woo, Ralph Winter, and the seminar participants at the Aarhus Business School, ABN AMRO Bank Conference on Private Equity Exit Strategies in Amsterdam, the American Finance Association Annual Conference, Cambridge University Judge Institute of Management, Center for Financial Studies in Frankfurt, Copenhagen Business School, University of Alberta, University of Amsterdam, the University of Manitoba, the University of Münster, and the University of New South Wales. Collection of the data was made possible with the generous assistance of the ABN AMRO Bank Corporate Finance Department, the University of Amsterdam, and the University of Alberta. Also, I am grateful to Sofia Johan and to the University of Amsterdam, University of Cambridge, and University of Frankfurt for their hospitality, which enabled me to engage in data collection related to this project. Any errors are my own.