Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/75570 
Authors: 
Year of Publication: 
1999
Series/Report no.: 
CESifo Working Paper No. 217
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper offers a new explanation for the prevalent use of convertible securities in venture capital finance. Convertible securities can be used to endogenously allocate cash flow rights as a function of the realized quality of the project. This property can be used to mitigate the double moral hazard problem be t ween the entrepreneur and the venture capitalist. It is shown that an optimally designed convertible security outperforms any mixture of debt and equity and that it can induce both parties to invest efficiently. The result is robust to renegotiation and t o changes in the timing of investments and information flows.
Subjects: 
Convertible securities
venture capital
corporate finance
double moral hazard
incomplete contracts
Document Type: 
Working Paper
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