Contract & capital Flashcards
(8 cards)
Axelson, Weisbach & Strömberg (2009) Q1: Why do private equity (PE) funds often prefer leveraged buyouts over fully equity-financed deals?
A1: High leverage disciplines the general partners (GPs) by limiting excess free cash flow, reducing the temptation to overinvest in low-quality deals. It also boosts equity returns when deals succeed, creating strong performance incentives.
Axelson, Weisbach & Strömberg (2009) Q2: What’s the benefit of ex post financing compared to raising all capital upfront (ex ante)?
A2: Ex post financing—raising capital deal-by-deal—creates tighter alignment between fund managers and investors. It allows better deal screening and avoids pressure to deploy capital during overheated markets, reducing overinvestment risk.
Kaplan & Strömberg (2002) Q1: How do VC contracts address the challenges of uncertainty and asymmetric information?
A1: Venture capital contracts use a mix of control rights (e.g., board seats), liquidation preferences, staged financing, and performance milestones. These mechanisms allocate control and protect investors from downside risk while motivating founders to perform.
Kaplan & Strömberg (2002) Q2: What does this study contribute to financial contracting theory?
A2: It provides empirical evidence that theoretical tools like staged funding and control allocation are widely used in practice to manage risk in early-stage investments. VC contracting is a real-world example of optimal financial design under uncertainty.
Hart (2001) Q1: Why are contracts in finance often incomplete, according to Hart?
A1: It’s impossible to foresee and specify every future event or contingency in a contract, especially under uncertainty. Incomplete contracts arise when not all future states or actions can be described or enforced in advance.
Hart (2001) Q2: How should contracts be designed to cope with uncertainty?
A2: Hart argues that contracts should focus on assigning control rights and providing renegotiation mechanisms. This allows parties to adapt and respond flexibly to unforeseen developments, which is key to long-term relational contracting.
Masulis & Nahata (2009) Q1: How can corporate venture capital (CVC) involvement affect startup governance and IPO outcomes?
A1: CVCs may bring valuable strategic resources but can also introduce conflicts of interest, particularly if they prioritize parent company goals over startup growth. Governance structures—like balanced boards—are crucial to managing this tension.
Masulis & Nahata (2009) Q2: Under what conditions does CVC add value to startups?
A2: When there’s proper board oversight and alignment of incentives, CVCs can help startups access industry insights, distribution networks, and technology partnerships. These advantages improve IPO performance and firm credibility.
