Abstract
We study the conflict of interests between the limited partners (LPs) and the general partner (GP) in a venture capital (VC) fund with a limited life span. LPs commit money, while the GP selects and monitors projects. Midway into the project, the GP privately observes the project's quality and the estimated time to exit. The fund's limited time horizon and the GP's informational advantage lead to inefficient decisions at this stage. First, the GP continues bad projects. Second, he may stop monitoring good, but delay-prone projects. We provide empirical predictions and illustrative evidence that the magnitude of the effect is significant.
| Original language | English |
|---|---|
| Pages (from-to) | 431-457 |
| Number of pages | 27 |
| Journal | Journal of Financial and Quantitative Analysis |
| Volume | 46 |
| Issue number | 2 |
| DOIs | |
| State | Published - Dec 2010 |
Bibliographical note
Funding Information:∗Kandel, [email protected], Department of Economics and Business School, Hebrew University of Jerusalem, Mount Scopus, Jerusalem 91905, Israel; Leshchinskii, leshchinskii@yahoo .com, Menlo College, 1000 El Camino Real, Atherton, CA 94027; and Yuklea, [email protected], Business School, Hebrew University of Jerusalem, Mount Scopus, Jerusalem 91905, Israel. We thank an anonymous referee, Hendrik Bessembinder (the editor), as well as Zeev Binman, Patrick Bolton, Guido Friebel, Dennis Gromb, Ulrich Hege, Thomas Hellmann, Josh Lerner, Moshe Levin, Stefano Lovo, Ludo Phallipou, Leopold Sogner, Eli Talmor, Isabel Tkatch, Flavio Toxvaerd, Moti Weiss, and participants at the 2nd Risk Capital and the Financing of European Innovative Firms (RICAFE) conference, the Vienna Symposium on Asset Management, the European Finance Association conference, and seminars at the Rensselaer Polytechnic Institute, the Norwegian School of Economics, and the University of Amsterdam for very useful comments and suggestions. We thank Michael Borns for his expert editorial assistance. We acknowledge financing from the European Commission, grant HPSE-CT-2002-00140. Kandel and Yuklea also acknowledge financial support under the Science, Technology, and Economy program of the Neaman Institute. Kandel acknowledges the support of the Krueger Center for Finance Research at the Hebrew University.