Venture Capital Financing and Corporate Governance: Role of Entrepreneurs in Minimizing Information / Incentive Asymmetry and Maximization of Wealth

Abstract

Although various corporate governance models have developed over the last 75 years the problems of information/ incentive asymmetry still exist and lead to corporate fraud, the abuse of managerial power, absence of transparency, and social responsibility issues. These problems remain unsolved around the world irrespective of the size of the country, type of economy, or the nature of business operations. This article suggests an alternative model, based on the multiplier effects of venture capital (VC) financing, to see whether information/incentive asymmetry ceases to exist and complete transparency emerges from resorting to venture capital financing (i.e., by both categories of entrepreneurs-venture capitalists as well as the assisted business units). An overview of venture capital financing over the last 60 years throws some light on an otherwise unexplored area in corporate governance. Various models proposed for efficient corporate governance support the initial argument and lead to the integration of venture capital financing in identifying the role of venture capital in corporate governance. To support and supplement the argument for the new model, future research areas have been identified.

TOPICS: Private equity, performance measurement