Raising Capital from Heterogeneous Investors
AbstractA firm raises capital from multiple investors to fund a project. The project succeeds only if the capital raised exceeds a stochastic threshold, and the firm offers payments contingent on success. We study the firm's optimal unique-implementation scheme, namely the scheme that guarantees the firm the maximum payoff. This scheme treats investors differently based on size. We show that if the distribution of the investment threshold is log-concave, larger investors receive higher net returns than smaller investors. Moreover, higher dispersion in investor size increases the firm's payoff. Our analysis highlights strategic risk as an important potential driver of inequality.
CitationHalac, Marina, Ilan Kremer, and Eyal Winter. 2020. "Raising Capital from Heterogeneous Investors." American Economic Review, 110 (3): 889-921. DOI: 10.1257/aer.20190234
- D21 Firm Behavior: Theory
- D86 Economics of Contract: Theory
- G24 Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill