Managerial Incentives and the Role of Advisors in the Continuous-Time Agency Model

Keiichi Hori, Hiroshi Osano
2013 The Review of financial studies  
This paper explores a continuous-time agency model with double moral hazard. Using a venture capitalist-entrepreneur relationship where a manager provides unobservable effort while a venture capitalist (VC) both supplies unobservable effort and chooses the optimal timing of the initial public offering (IPO) with an irreversible investment, we show that optimal IPO timing is earlier under double moral hazard than under single moral hazard. Our results also indicate that the manager's
more » ... nager's compensation tends to be paid earlier under double moral hazard. We also derive several comparative static results for the IPO timing and managerial compensation profile, all of which provide new empirically testable implications. Usefully, even where the VC does not completely exit with the IPO, such that there is a requirement for a multiagent analysis after the IPO, most of our results remain unchanged. In addition, our model applies to not only the VC exit through the M&A (Mergers and Acquisitions) process but also the dissolution of joint ventures and corporate spin-offs. JEL Classification: D82, D86, G24, G34, M12, M51.
doi:10.1093/rfs/hht027 fatcat:kjwcv7ukonebtotqtkux4jofda