A Study On Cash Flow Rights Configuration In Venture Capital Based On Over-confidence

With the development of the venture capital, people pay more attention to the bilateral moral hazard between entrepreneurs and venture capitalists. How to effectively restrain bilateral moral hazard has become a research hotspot. This paper introduced the venture capitalist and the entrepreneur overconfidence to venture capital cash flow rights configuration model, expecting to solve the double moral hazard problem with improved cash flow rights allocation means, which is in line with a more actual situation of the cash flow rights allocation mechanism.The paper firstly gives an overview of double moral hazard, building the contractual models of cash flow right configuration mechanism in the case of complete information and incomplete information. Then introduce the venture capitalist and the entrepreneur overconfidence to venture capital cash flow rights configuration model. Aim to figure out the impact of overconfidence on investors and entrepreneurs’ effort cost and compare the difference among different financial tools. After that, the paper introduces venture capital supervision mechanism of the entrepreneur to figuter out the change of joint efforts, and expected revenue differences between venture entrepreneur and venture capitalist; then discussed the synergistic effects of overconfidence and supervision mechanism.The paper draws the following conclusions:First, no matter in common stock or convertible security contract, overconfident venture capitalists or venture entrepreneur will pay more effort level than reasonable circumstances.Second, under the convertible securities contract, venture capitalist’s effort level is higher, compared with the common stock, contract, meaning the convertible bond can give venture capitalists higher incentive. However, the venture entrepreneur’s effort level is lower, means convertible bonds decreases the risk entrepreneur incentive. But over-confidence can offset the negative effect on incentive entrepreneur in the convertible bond. Third, supervision mechanism would reduce speculative dynamics of entrepreneurs and increase their effort level and expected income. When using optimal allocation proportion distribute their efforts, venture capitalists’ effort level, and expected revenue will increased. Fourth, external supervision reduces with the increase of entrepreneur and venture capitalist’s overconfidence level. This shows that:the entrepreneur or the venture capitalist’s overconfidence and supervision are substitutes.