The Convertible Preferred Equity Puzzle in Canadian Venture Capital Finance
- Topics:
- Working Capital
- Tags:
- Equity,
- Finance,
- Financial Accounting,
- Financing,
- Financing Startups,
- Investment,
- Venture Capital
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Overview: U.S. based research has demonstrated that convertible preferred equity is the optimal form of venture capital finance. This paper introduces a large and detailed data set on forms of finance used by Canadian venture capitalists in 5323 financing transactions from 1991 to 1998. Surprisingly, over the years for which there exists data in Canada, convertible preferred equity has never been the most frequently used form of finance, and there have been changes in the intensity of use of different forms of finance over time. These differences are probably not due to differences in Canadian and U.S. definitions of venture capital, as the results hold in every possible subsample of the data (by type of venture capital firm and type of entrepreneurial firm), including the subsamples most similar to the U.S. definitions. Tests of various theories of capital structure are considered to offer explanations for the observed use of a heterogeneous mix of forms of finance. Contracts with different forms of finance appear to be functionally different, and in the main used in different ways to resolve agency problems and assign control and cash flow rights subject to the particular type of financing transaction. The results are quite robust over different time periods and types of venture capital funds.
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Format: HTML | Date: Apr 2002 | Pages: 1
