2 - Overview of Agency Theory, Empirical Methods, and Institutional Contexts

Abstract

In this chapter, we provide an overview of the agency costs in the context of different forms of finance (debt, convertible debt, preferred equity, convertible preferred equity, common equity, warrants). Many agency principles can be illustrated within this context. Further, because both venture capital and private equity funds use all of these different forms of finance in practice, it is not an “academic” or trivial exercise to study all forms of finance in the context of either venture capital and/or private equity. In this chapter, we review what each form of finance (debt, convertible debt, preferred equity, convertible preferred equity, common equity, warrants) actually entails, analyze how different types of agency problems arise when different forms of finance are used, consider how mitigating agency problems can enhance firm value, and provide direction for subsequent chapters in this book on related topics of how venture capital and private equity fund managers use contracts to mitigate agency problems and enhance firm value.