Research For The Determination Of The Optimal Portfolios In Venture Capital Finance Based On Double Moral Hazard

With the globalization of economy and the acceleration of industrial structure allover the world, many countries have been paying great attention to the development of hi-tech- industry. From 40s of last century, the success of venture capital in America had promoted the transformation of the hi-tech and impulse the economy of America. With the coming of knowledge economy, our country begins realizing the importance of VC, especially the special functions of VC in the restructure of economy and the improvement of science and technology. So the study of venture capital embodies the important value in theory and the significance in practice at present.The moral hazard problems of venture capital are considerable issues and the toughest questions which a lot of economic scholars study of at presents. But the literature concentrate on the agent's moral hazard mainly;has ignored the principle's moral hazard. Through previous studies, we know that VC and entrepreneurs have to cooperate together in the process of venture investment, but the efforts of them can not be predicted, so there is double moral hazard problem between them. At the same time, if other factors don't change, when we invest more projects, the income of the venture capitalists will increase. But there is a restriction of the effort of venture capitalists and the portfolio. When venture capitalist invests many more projects, they offer the endeavor which invests to each project will decrease. Moreover, if venture capitalist invests little time to the project, he provides the suggestion to the risk project the quantity and the quality of offering the endeavor will reduce, and then the entrepreneur will request to share more profits. So the income of venture capitalist will reduce simultaneously. And two kinds of strengths affect together which caused the profit of venture capitalist. Therefore there is a equilibrium between the optimal portfolio in venture capital and the endeavor of venture capitalist or the entrepreneur. Against such a background, the determination of the optimal portfolio of start-up firms in venture capital finance based on double moral hazard is analyzed in this thesis and some ideas are presented.This Paper builds on a few recent important papers in the VC literature. Kanniainen and Keuschnigg (2003) provide seminal theoretical analysis of the optimal size of VC's portfolios. Fulghieri and Sevilir (2004) offer related theoretical work that considers VC's incentives to concentrate on a single venture versus investment in two ventures. Cumming (2004)provide an empirical analysis of VC portfolio size based on a Canadian-only dataset.This paper begins with summing up VC, and analyzes the double moral hazard and the double moral hazard in venture investment. Meanwhile, We analyze the question about optimal effort level choices, and develop a model of the optimal structure of VC's portfolio in the presence of double-sided moral hazard,and analyze the relation between the VC's optimal portfolio structure and exogenous factors, such as entrepreneurs'and VC's productivities, their disabilities of effort, the value of a successful project, and the required initial investment in each venture. And then, the study shows that when both the portfolio size and the profit sharing rule are endogenous, the relations between the portfolio size and the qualities and the disabilities of effort the VC and the entrepreneurs are ambiguous. The optimal portfolio size is increasing in the value of a successful project, and is decreasing in the required initial investment. Lastly, we take some advice on how to rationalize the setting of VC's determination of the optimal portfolios in china.