Contracts and Exits in Venture Capital Finance

Abstract

Using a sample of European venture capital (VC) investments, I study the relation between VC contracts and exits. The data indicate that ex ante, stronger VC control rights increase the likelihood that an entrepreneurial firm will exit by an acquisition, rather than through a write-off or an IPO. My findings are robust to controls for a variety of factors, including endogeneity and cases in which the VC preplans the exit at the time of contract choice. My findings are consistent with control-based theories of financial contracting, such as Aghion and Bolton (1992). The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.