| Author: | Hellmann, T. |
| Title: | IPOs, acquisitions, and the use of convertible securities in venture capital |
| Journal: | Journal of Financial Economics
2006 : SEP, VOL. 81:3, p. 649-679 |
| Index terms: | convertible bonds initial public offerings mergers venture capital |
| Language: | eng |
| Abstract: | The article provides a new explanation for the use of convertible securities in venture capital. A key property of convertible preferred equity is that it allocates different cash flow rights, depending on whether exit occurs by acquisition or IPO. The study builds a model with double moral hazard, where both the entrepreneur and the venture capitalist provide value-adding effort. The optimal contract gives the venture capitalist more cash flow rights in acquisition than IPOs. |
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