Liu, Xuewen
(2007) Essays on Corporate Finance under
Information Asymmetry. PhD Thesis, LSE-UK.
Essay 1: Stage Financing and Syndication in Venture
Capital Investment: The combined use of stage financing and syndication is one
of the most remarkable characteristics of venture capital financing. In
particular, the majority of later-stage venture capital investments rather than
early-stage are syndicated. The paper presents a theoretical rationale for this
financial arrangement. The model shows that tight control (i.e. efficient
refinancing or continuation/liquidation decision) of the venture capitalist by
stage financing can achieve ex-post efficiency but may disincentivize the
entrepreneur's effort provision ex-ante. Hence, the project value is not
maximized. I show that the combined use of later-stage syndication with stage
financing is a mechanism that can realize the optimal tradeoff between high
effort ex ante and efficient continuation ex post thus maximizing project
value. The model offers testable empirical predictions. Essay 2: The Capital
Structure of Private Equity-backed Firms: In this paper I study one fundamental
tension between venture capitalist and management in private equity-backed
firms and show capital structure (of private equity-back firms) is a mechanism
to resolve the tension. The paper gives rationale for several financial
arrangements in private equity investment. (1) Private equity deals are
typically partially outside financed even though the private equity fund may
not be financially constrained at the deal level. (2) The optimal security for
outside financing is debt. (3) The maturity of outside security is long-term.
The insight of the paper has applications outside of private equity. Essay 3:
Market Transparency and the Accounting Regime: We model the interaction of
financial market transparency and different accounting regimes. This paper
provides a theoretical rationale for the recently proposed shift in accounting
standards from historic cost accounting to marking to market. The paper shows
that marking to market can provide investors with an early warning mechanism
while historical cost gives management a "veil" under which they can
potentially mask a firm's true economic performance. The model provides new
explanations for several empirical findings and has some novel implications. We
show that greater opacity in financial markets leads to more frequent and more
severe crashes in asset prices (under a historic-cost-accounting regime).
Moreover, our model indicates that historic cost accounting can make the
financial market more rather than less volatile, which runs counter to
conventional wisdom. The mechanism shown in the model also sheds light on the
cause of many financial scandals in recent years.
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