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The Optimality of Multi-stage Venture Capital Financing:  An Option-Theoretic Approach

The Optimality of Multi-stage Venture Capital Financing: An Option-Theoretic Approach

For venture capital firms, facing undiversifiable risks, multi-staged financing is an optimal contract which offers significant risk reduction at a cost of only slightly lower potential return. The optimality does not depend on the presence of moral hazard and agency problems. Our theoretical model of multi-stage financing, largely based on Asian option pricing theory, allows us to compute the risk reduction ratio due to multi-staging. The...

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