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The effect of capital market characteristics on the value of start-up firms

Inderst, Roman and Muller, Holger M. (2004) The effect of capital market characteristics on the value of start-up firms. Journal of Financial Economics, 72 (2). pp. 319-356. ISSN 0304-405X

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Abstract

We develop an equilibrium model of contracting, bargaining, and search in which the relative scarcity of venture capital affects the bargaining power of entrepreneurs and venture capitalists. This in turn affects the pricing, contracting, and value creation in start-ups. The relative scarcity of venture capital is endogenous and depends on the profitability of venture capital investments, entry costs, and transparency of the venture capital market. Supply and demand conditions also affect the incentives of venture capitalists to screen projects ex ante. We characterize both the short- and long-run dynamics of the venture capital industry, which provides us with a stylized picture of the Internet boom and bust periods. Our model is consistent with existing evidence and provides a number of new empirical predictions.

Item Type: Article
Official URL: http://jfe.rochester.edu/
Additional Information: © 2003 Elsevier BV
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Research centres and groups > Financial Markets Group (FMG)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 08 Oct 2008 08:36
URL: http://eprints.lse.ac.uk/14930/

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