Bilateral Moral Hazard Risk Of The Investment Capital Structure Research

The great profitable potential coming with huge risk of the venture enterprises causes special characteristics of venture capital investment contracts. Designing a reasonable financing structure to provide an effective incentive to both sides of financing is the keystone of venture capital investment contracts. This thesis tries to offer a theoretic explanation for the specialties of the venture capital financing structure.Firstly, this thesis gives a brief introduction of conceptions and empirical researches of venture capital and venture capital investment contracts. These researches show that the non-financing support provided by venture capitalists impulses the value-increasing of venture enterprises. Then designing a double-sided incentive mechanism is the key of financing contracts designing. And empirical researches also display the phenomena that the convertible securities are prevalently used in venture capital. Whether this kind of financing tools can solve the double moral hazard problem in venture capital financing should be proved by theoretic researches.Secondly, this thesis also introduces the principal-agent theory and reviews related theory researches for the capital structure of enterprises invested by venture capitalists. In these researches, it is difficult to deduce the practical financing tools directly from the principal-agent models, and the reality of the venture capital financing can not be explained by the results of these researches persuasively. So we introduces a different approach used by Robe (1999) , which sides over the knot of deducing models, and successfully approves the effect of financing tools under one side moral hazard situation.Finally, this thesis tries to provide an explanation for the incentive structure and the financing effect of the convertible securities under double moral hazard. We use the numerical method to solve the model by restricting the financing tools as trisection linearity structure, convertible preferred stocks and participating convertible preferred stocks. After that, we analyze the incentive mechanism of the optimal trisection linearity structures and calculate the financing effect of convertible preferred stocks. The results show that convertible preferred stocks can deal with the double moral hazard problem 'nearly optimally'. So this research provides a credible support for the empirical researches.