Bargaining Power Effects in Financial Contracting: A Joint by Kai Rudolph

By Kai Rudolph

This paintings used to be authorized as a dissertation through the college of Muenster, Germany, in 2004. It was once written whereas i used to be a educating and learn assistant on the division of Banking. I personal many bills - own and highbrow - to Professor Dr. Andreas Pfingsten, my doctoral adviser, for his total aid whereas i used to be writing my dissertation. This thesis benefited a lot from his positive feedback. i'm additionally thankful that Professor Dr. Klaus Roder, division of Finance, collage of Regensburg, Germany, acted as my moment consultant. in addition, i need to thank Dr. Alistair Milne, Sir John Cass enterprise institution, urban collage, nice Britain, because he assisted me in the course of an important section of my dissertation undertaking whereas i used to be staying as a vacationing student on the Marie Curie education web site in company Finance, Capital Markets and Banking at Cass. This 5 month stopover at in London was once financially supported through the ecu fee (Fellowship Ref. No. HPMT-GH-01-00330-04). i'm additionally indebted to my prior colleagues, usually Dr. Hendrik Hakenes and Dr. Markus Ricke, for his or her encouragement and important discussions all through my entire dissertation venture. The dissertation additionally benefited from reviews on a primary operating paper in regards to the dissertation's subject through contributors of analysis seminars on the Universities of Constance, Tuebingen and Osnabrueck, Germany, and on the 2003 Annual assembly of the eu monetary organization, Stockholm, Sweden.

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In this setting Fairchild shows that total welfare is only maximized when the venture capitalist possesses high value-adding capabilities and the entrepreneur has all bargaining power. Empirically, Gompers and Lerner (1996) find that venture capital funds in the United States are able to reduce the number of restrictive covenants imposed by their investors in years with high capital supply. They interpret this observation as a result of an increased bargaining power by venture capital funds.

Additionally, private lenders have a comparative advantage to public lenders in enforcing bond covenants since formal bankruptcy proceedings are not always optimal to cope with covenant violations (cf. Smith and Warner (1979)). Alternative private renegotiations are easier among a small number of private lenders t h a n among a large number of dispersed public investors (cf. ^^ Krishnaswami et al. (1999) observe t h a t firms with greater moral hazard problems hold higher proportions of private debt.

However, whatever reason exists for this phenomenon,^^ it is not due to the circumstances described here where all financing mixes t u r n out to be inefficient. We must note t h a t , only simple one-period, cash flow based financial contracts between the lender and the borrower are analyzed, which do not allow the fixing of contract conditions contingent on the proclaimed project return.

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