Venture capital and the structure of capital markets: banks versus stock markets 1 The authors are grateful for helpful suggestions from the editor and an anonymous referee, and from Anant Admati, Erik Berglof, Stephen Choi, Kevin Davis, Uri Geiger, Victor Goldberg, Paul Gompers, Joseph Grundfest, Ehud Kamar, Michael Klausner, Joshua Lerner, Ronald Mann, Paul Pfleiderer, Mark Ramsayer, Charles Sabel, Allen Schwartz, and Omri Yadlin, and from participants in workshops at Columbia Law School, Harvard Law School, Stanford Law School, the Max Planck Institute (Hamburg, Germany), and the American Law and Economics Association. Research support was provided by Columbia Law School and the Roberts Program in Law and Business, Stanford Law School. We thank Laura Menninger, Nishani Naidoo, Annette Schuller, and Ram Vasudevan for research assistance. 1

Venture capital and the structure of capital markets: banks versus stock markets 1 The authors... The United States has many banks that are small relative to large corporations and play a limited role in corporate governance, and a well developed stock market with an associated market for corporate control. In contrast, Japanese and German banks are fewer in number but larger in relative size and are said to play a central governance role. Neither country has an active market for corporate control. We extend the debate on the relative efficiency of bank- and stock market-centered capital markets by developing a further systematic difference between the two systems: the greater vitality of venture capital in stock market-centered systems. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers; especially, the importance of the opportunity to enter into an implicit contract over control, which gives a successful entrepreneur the option to reacquire control from the venture capitalist by using an initial public offering as the means by which the venture capitalist exits from a portfolio investment. We also extend the literature on venture capital contracting by offering an explanation for two central characteristics of the U.S. venture capital market: relatively rapid exit by venture capital providers from investments in portfolio companies; and the common practice of exit through an initial public offering. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Venture capital and the structure of capital markets: banks versus stock markets 1 The authors are grateful for helpful suggestions from the editor and an anonymous referee, and from Anant Admati, Erik Berglof, Stephen Choi, Kevin Davis, Uri Geiger, Victor Goldberg, Paul Gompers, Joseph Grundfest, Ehud Kamar, Michael Klausner, Joshua Lerner, Ronald Mann, Paul Pfleiderer, Mark Ramsayer, Charles Sabel, Allen Schwartz, and Omri Yadlin, and from participants in workshops at Columbia Law School, Harvard Law School, Stanford Law School, the Max Planck Institute (Hamburg, Germany), and the American Law and Economics Association. Research support was provided by Columbia Law School and the Roberts Program in Law and Business, Stanford Law School. We thank Laura Menninger, Nishani Naidoo, Annette Schuller, and Ram Vasudevan for research assistance. 1

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Publisher
Elsevier
Copyright
Copyright © 1998 Elsevier Science S.A.
ISSN
0304-405x
DOI
10.1016/S0304-405X(97)00045-7
Publisher site
See Article on Publisher Site

Abstract

The United States has many banks that are small relative to large corporations and play a limited role in corporate governance, and a well developed stock market with an associated market for corporate control. In contrast, Japanese and German banks are fewer in number but larger in relative size and are said to play a central governance role. Neither country has an active market for corporate control. We extend the debate on the relative efficiency of bank- and stock market-centered capital markets by developing a further systematic difference between the two systems: the greater vitality of venture capital in stock market-centered systems. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers; especially, the importance of the opportunity to enter into an implicit contract over control, which gives a successful entrepreneur the option to reacquire control from the venture capitalist by using an initial public offering as the means by which the venture capitalist exits from a portfolio investment. We also extend the literature on venture capital contracting by offering an explanation for two central characteristics of the U.S. venture capital market: relatively rapid exit by venture capital providers from investments in portfolio companies; and the common practice of exit through an initial public offering.

Journal

Journal of Financial EconomicsElsevier

Published: Mar 15, 1998

References

  • Robust financial contracting and the role of venture capitalists
    Admati, A; Pfleiderer, P
  • Grandstanding in the venture capital industry
    Gompers, P
  • Optimal investment, monitoring, and the staging of venture capital
    Gompers, P
  • Venture capitalists and the oversight of private firms
    Lerner, J
  • Insiders and outsiders: the choice between informed and arm's length debt
    Rajan, R
  • Strong managers, weak owners
    Roe, M

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