Research On The Governance Mechanism Of The Double Moral Hazard In Venture Capital Syndication

High risks and asymmetric information in venture finance determines the venture capitalists often face enormous risks in the investment process. In the venture capital syndicate process, the project's success depends on the joint efforts of the leading investor (leader) and the following investor (follower), however, the asymmetry of information determines the leader and the follower who have their own information advantages and weaknesses, due to the inconsistencies of the interests of the two sides that add the opportunity to take opportunistic behavior, resulting in the formation of the double moral hazard.This paper introduces the effort levels of the two sides and the private benefit of the leader into the revenue function. Under this idea, this paper analyzes respectively the formation and the governance mechanism of the moral hazard under equity contract arrangement and convertible security contract arrangement, and then improves arrangement of these two contracts by combining with the transfer payments, In addition, from the perspective of cost-efficiency factor of both participants' efforts, this paper combines the control right and the cash flow right to avoid the double moral hazard. We reach the following findings:1. Under equity contract arrangement and convertible security contract arrangement, the paper discusses the causes of the double moral hazard and the methods to avoid the risks in two states--collective rationality and individual rationality. The results indicate under ordinary equity contract arrangements, in the state of individual rationality, both investors' effort levels are lower than that of collective rationality, which produces the double moral hazard, and the reduction of the efforts also reduces the final output of the joint project. At the same time, under the individual rationality, the leader seeks a higher private benefit, and also faces some moral hazards. And similar conclusions are reached under the convertible security contract arrangement, when the conditions of the conversion option are satisfied.2. The leader has the opportunity to reap the advantages of private benefit, and under the individual rationality, for the maximization of individual interests, the leader seeks more private benefit. Reducing private benefit indirectly encourages investors to improve their effort levels. Based on this idea, in the case of individual rationality, the paper adjusts the equity contract arrangement and convertible security contract arrangement by introducing a transfer payment, which can reduce the private benefits of the leader, thereby improving the investors' effort levels and alleviating some moral hazards.3. The control right is introduced on the basis of the cash flow right, and the control right income reflects on the change of the effort-cost coefficient of the two sides. Based on this idea, this paper finds that under the individual rationality, with the equity contract arrangement and the control right, regardless of that the leader has the control right or the follower has the control right, or both sides share the control right. Besides, by analyzing of effort-cost coefficient range, we can obtain the optimal control structure configuration. The same conclusion can be obtained under the convertible security contract arrangement when natural state meets certain conditions.Based on the previous research results and the correlation theories foundation, this paper studies the double moral hazard governance mechanism in venture capital syndication. Our study has certain guiding significance and reference value for the development of China's venture capital industry.