Research On Adverse Selection And Moral Hazard In Venture Capital Investment Of China

With the rapid development of High-Tech SMEs, their financial requirements result in the independence of venture capital from traditional investment fields and the establishment of a series of theories and new operation system. The financing characteristics of High-Tech SMEs in different periods enmesh them in such a dilemma, that they have strong capital demand but haven't got enough pledge assets. In the circumstances of failure in bank loans, venture capital becomes the best financing channel. Venture capital investment, which is actually an innovation of financial system, has solved the bottleneck problem in the capita management of High-Tech SMEs and played a positive role during their development. The venture capitalists and entrepreneurs are the main parties in the financing process, between which there forms the principal-agent nexus. The high risk and technique specialization can cause seriously information asymmetry between principals and agents, which increase the incentive force of entrepreneurs to conceal real information and aggravate the adverse selection and moral hazard. Based on these, this thesis is going to analysis the adverse selection and moral hazard caused by principal-agent problem.The entrepreneurs could use the investment proposal as the medium to send information of their capability and quality of projects by adjusting the level of proposal. In the case of incomplete information, the competent entrepreneur with good project will make higher level proposals than such cases in the complete information so as to send signals that indicate their type. The entrepreneur can continue to deliver information via the proposal by the reserved proportion of control-right of venture capitalists as a signal. Such mechanism is based on the analysis that when the venture capitalist finds out the entrepreneur was incompetent after they signed the investment contract, the former can dismiss or replace the latter in the condition of getting the control-right. The result of separated equilibrium comes when the competent entrepreneur hold less control-right to differentiate from inefficient one.The evolutionary game analysis of moral hazard finishes up with the conclusion that when venture capitalists'punishments were reliable and the plight of the slothful became worse than laborious because of the loss of private benefit, the whole industry will evolve into the ideal situation.