The paper offers a new explanation for the widely observed use of redeemable and convertible preferred stock in venture capital finance. Redeemable and convertible preferred stocks can be used to endogenously allocate cash flow and control rights as a function of the state of nature, the...

The paper presents an adverse selection-based explanation of the fact that some entrepreneurs choose to finance multiple projects together by issuing a single security and other entrepreneurs decide to finance each project separately. We consider the financing problem of an entrepreneur who has...

This article shows that investors financing a portfolio of projects may use the depth of their financial pockets to overcome entrepreneurial incentive problems. Competition for scarce informed capital at the refinancing stage strengthens investors' bargaining positions. And yet, entrepreneurs'...

This paper develops a model to explore how adverse selection and search frictions affect the allocation of venture capital. Entrepreneurs have private information about their projects' quality and compete in a search market to attract investors. The combination of low capital supply and...

This paper presents a theory for Islamic venture capital namely ‘Mudharabah' contract under adverse selection problem. In order to avoid selecting a low type entrepreneur for a given good project, the framework defines the profit sharing ratio (PSR) as a screening device. We then develop a...

The subprime crisis would never have occurred had investors not been such enthusiastic consumers of subprime securities. The investors now say, somewhat self-servingly (but probably correctly), that they did not understand the securities - securities for which they were willing to pay very high...