Heterogeneous beliefs and optimal ownership in entrepreneurial financing decisions. Issue 11 (2nd November 2018)

• Record Type: Journal Article
• Authors: Tavares-Gärtner, Miguel; Pereira, Paulo J.; Brandão, Elísio
• Is Part Of: Quantitative finance. Volume 18:Issue 11(2018)
• Page Start: 1947
• Page End: 1958
• Publication Date: 2018-11-02
• Subjects: Venture capital -- Entrepreneurship -- Entrepreneurial finance -- Real options; G24 -- L26 -- D81 -- G31; Finance -- Periodicals; Business mathematics -- Periodicals; Finance -- Mathematical models -- Periodicals; Investments -- Mathematics -- Periodicals; Economics -- Periodicals; Finances -- Modèles mathématiques -- Périodiques; 332.015118
• DOI: 10.1080/14697688.2018.1432882
• Languages: English
• ISSNs: 1469-7688

Abstract

Abstract : Our setting comprises one entrepreneurial firm with a growth opportunity seeking for external funding from a venture capitalist, where the entrepreneur and venture capitalist have homogeneous or heterogeneous beliefs about its growth prospects. We developed a real options model to determine the optimal ownership structure that triggers the simultaneous exercise of the growth option on the entrepreneurial firm by entrepreneurs and venture capitalists. Our results show that the more optimistic any of the parties is, the lower the post-money firm ownership that party will retain. However, optimism leads parties to delay their decision to invest in the entrepreneurial firm, by demanding higher profit triggers and investing only in more valuable entrepreneurial firms. The combination of these two effects leaves perceived returns on investment unchanged and not dependent on their own optimism.