ArticlePDF Available

A development bank’s choice of private equity partner: a behavioural game-theoretic approach

Authors:
Richard J. Fairchild at University of Bath
Richard J. Fairchild
Ian Crawford
Ian Crawford
Ian Crawford
  • This person is not on ResearchGate, or hasn't claimed this research yet.
Adil el Fakir at Sheffield Hallam University
Adil el Fakir
Download full-text PDF
Read full-text
Download citation

Abstract

We develop a formal game-theoretic analysis of the economic (value-adding abilities) and behavioural factors (empathy, emotional excitement, passion) affecting a development bank’s choice of private-equity partner when investing into emerging market entrepreneurship. Triple-sided moral hazard (TSMH) problems occur in the form of effort-shirking, since the bank, the PE-manager, and the entrepreneur all contribute to value-creation. The bank’s investment choices are crucially affected by a) the relative abilities and the potential level of empathy, excitement and passion that may be generated between a PE-manager and an entrepreneur, and b) the personal emotional attachment that the bank develops towards a PE. The severity of TSMH increases inefficiencies in decision-making. Finally, we consider, in addition to political risk mitigation, an additional impact that the bank may have on PE/E value-creation: the bank may have a coaching/mentoring role. Our analysis has implications for academics and practitioners alike.
Content uploaded by Richard J. Fairchild
Author content
All content in this area was uploaded by Richard J. Fairchild on Oct 18, 2019
Content may be subject to copyright.
A Development Bank’s Choice of Private Equity Partner: A Behavioural Game-
theoretic Approach
Authors: Richard Fairchild, Ian Crawford: School of Management, University of
Bath, UK
Adil El-Fakir: Sheffield Business School, Sheffield Hallam University
Please note: This paper is Gold Open Access at the Journal’s website, and
therefore is freely available at the DOI link below:
https://www.tandfonline.com/doi/full/10.1080/1351847X.2019.1647863
... Further, the author concludes that policy should focus on the bargaining power of crowdfunders if it aims to promote crowdfunding processes and platforms. Fairchild et al. (2019) analyze the factors affecting a development bank's choice of a private equity partner when investing in entrepreneurship in emerging markets. The authors present a game-theoretic analysis of how the development bank's decisions are affected by economic factors and behavioral characteristics (such as passion and excitement) of private equity firms and entrepreneurs, in addition to the bank's own emotional biases. ...
Game theory in entrepreneurship: a review of the literature
Article
  • Sep 2023
Purpose The purpose of this paper is to review the utilization of game theory in the entrepreneurship literature. Game theory can potentially be employed to assess strategies incentivizing productive entrepreneurial activities and subsequent economic development. Therefore, the author reviews entrepreneurship articles and explores the application of game-theoretic models and concepts in the literature. Design/methodology/approach First, the author provides an overview of the entrepreneurship ecosystem concept, highlighting key challenges in its study. The author also briefly highlights successful applications of game theory in the innovation literature. Second, the author systematically reviews and synthesizes entrepreneurship research employing game-theoretic models and concepts. The author's objective is to provide a state-of-the-art overview of the use of game theory in entrepreneurship. Findings Broadly, the author categorizes entrepreneurship-game theory articles into three groups based on their scope and purpose: entrepreneurial policy applications, inter-firm applications and entrepreneurship theory applications. Entrepreneurial policy applications include entrepreneurs and the government or policy as the main players in a game. Inter-firm applications encompass games between entrepreneurs and other private entities. Entrepreneurship theory applications include articles that utilize game theory to advance the author's understanding of entrepreneurial behavior and/or mechanisms in the market. Originality/value To the best of the author's knowledge, no previous paper has reviewed the use of game-theoretic approaches and models in entrepreneurship literature. This study addresses this research gap.
View
... This project will produce a certain, guaranteed, risk-1 Some behavioural corporate finance researchers have developed game-theoretic models to analyse the combined effects of economic (agency/moral hazard) and behavioural factors in other interesting areas. For example, Fairchild (2018) and Fairchild et al. (2019) consider the effect of economic and behavioural factors in the hedge fund industry, and in a development bank's relationships with its private equity financiers and entrepreneurs. Fairchild et al. (2020) develop a theoretical analysis of the effects of managerial agency issues and overconfidence on the corporate hedging decision. ...
Corporate Dividend Policy, Managerial Overconfidence, Myopia, and Investor Irrationality: A Complex Concoction
Article
Full-text available
  • Aug 2023
  • Eur J Finance
Corporate dividend policy is a puzzle, especially when considering the effects of economic and behavioural factors. We develop a theoretical analysis of corporate dividend policy in order to analyse the effects of the complex mix of managerial moral hazard, overconfidence, and myopia on managerial incentives to increase or decrease dividends. Furthermore, we consider the effect of investor irrationality that drives corporate dividend catering behaviour. We investigate how this complex mix of economic and behavioural factors is likely to affect dividend policy. Our analysis provides a deep theoretical underpinning to understanding these effects and provides a basis for future empirical research. Keywords: Dividends, value, managerial overconfidence, ability, myopia, catering, moral hazard JEL Classification: G34, G35
View
Understanding the multifunctional role of entrepreneurial coaching through a systematic review of the literature
Article
Full-text available
  • Feb 2024
Purpose The aim of this study is to systematise the entrepreneurial coaching (EC) literature by understanding how the phenomenon has been investigated along four dimensions inspired by Gartner’s (1985) conceptualisation of entrepreneurship: entrepreneurial process, context, target and outcomes. In so doing, this study will provide a frame of its multifunctional role and identify relevant gaps and suggestions for future research. Design/methodology/approach We conducted a systematic literature review to collect existing works on EC. We analysed 85 selected papers with a qualitative content analysis that allowed us to highlight relevant research themes for the entrepreneurial process, context, outcomes and target. Findings Our results demonstrate that EC has a multifunctional role in entrepreneurship that can be summarised in five different typologies, depending on the stage of the entrepreneurial process in which it is applied, the context, the target and the outcomes. Originality/value As one of the first attempts to systematise studies on EC, this work extends previous conceptualisation of EC by detailing different typologies of this intervention, thereby contributing to reduced fragmentation and conceptual ambiguity.
View
Entrepreneurship and strategies for economic development
Article
Full-text available
  • Dec 2016
  • SMALL BUS ECON
In this work, we analyse the characteristics of the entrepreneurial environment and examine whether a relation exists between these characteristics and the country’s stage of economic development. For this purpose, we use the national experts’ opinions from the Global Entrepreneurship Monitor Project. We aim to identify whether the experts’ opinions are in line with the different stages of economic development, or more specifically, whether we can see patterns in their opinions that reflect the different stages in the entrepreneurial environment of countries. If this proves to be the case, the information provided by the national experts in terms of facilitators of, and obstacles to, entrepreneurship and their recommendations for boosting entrepreneurial activity, would be useful to national governments in the design of entrepreneurial policies to help the country to move up to a higher stage of economic development. We use data from the survey of 1259 GEM project national experts from the 67 countries that participated in 2013. Our results confirm the existence of patterns that could be useful for policymakers dealing with entrepreneurship.
View
Cherry-picking or frog-kissing? A theoretical analysis of how investors select entrepreneurial ventures in thin venture capital markets
Article
Full-text available
  • Mar 2016
  • SMALL BUS ECON
We propose a formal model that analyzes which entrepreneurial ventures actively seek and subsequently obtain venture capital (VC) financing in thin VC markets. The model shows that in thin VC markets, (1) VC investors will invest in companies in need (frog-kissing) rather than in best performers (cherry-picking), and (2) the best performing ventures will self-select out of the market for VC. These conclusions are in line with the results from the literature, which note that in Europe many entrepreneurial firms do not actively seek VC investment and that VC investors do not appear to possess the same cherry-picking ability that they have in the US.
View
The creation of relational rents in venture capitalist-entrepreneur dyads
Article
Full-text available
  • Nov 2001
This paper focuses on the question of how relational rents can be created in the venture capitalist-entrepreneur dyad. It identifies how theoretical frameworks, such as agency theory and procedural justice theory, have been used to describe the relationship between venture capitalists and entrepreneurs. Further, it shows how other research streams, such as organizational learning theory and social exchange theory, may be integrated with research on venture capital financing. The central thesis of the paper is that relational rents can be created in venture capitalist-entrepreneur dyads through relation-specific investments and knowledgesharing routines, based on an effective governance of the relationship between both parties.
View
Passion for what? Expanding the domains of entrepreneurial passion
Article
  • May 2017
Entrepreneurial passion helps coordinate cognition and behavior of entrepreneurs, providing the fire that fuels innovation, persistence, and ultimate success. However, our knowledge of the sources of passion is limited and focuses primarily on activities predetermined by scholars, rather than those generated by entrepreneurs themselves. Using a phenomenological approach, we conduct an inductive qualitative study of 80 entrepreneurs and analyze their oral histories to explore the sources of entrepreneurial passion as described by entrepreneurs. Our discovery process suggests six major sources of entrepreneurial passion: passion for growth, passion for people, passion for the product or service, passion for inventing, passion for competition, and passion for a social cause. This extends prior research that focuses on passion toward a more limited range of activities.
View
View
Passionate bricoleurs and new venture survival
Article
  • Aug 2016
  • J BUS VENTURING
The impression of entrepreneurship as an intentionally orchestrated activity has been challenged by more creative approaches. In this study we investigate the previously unexplored relationships between entrepreneurial passion, bricolage, and entrepreneurial survival. In a sample of 2489 Finnish entrepreneurs who started new businesses between 2005–2010, we find higher levels of bricolage among those, whose businesses were still surviving in the end of 2011. Further, our analyses reveal that entrepreneurs who are passionate about inventing and developing their ventures are more likely to engage in bricolage and, combined, the affective state of passion and the “make-do” behaviors of bricolage help entrepreneurs keep their businesses going.
View
A Prisoner's Dilemma Approach to Entrepreneur-Venture Capitalist Relationships
Article
  • Jan 1997
New business startups with venture capital backing depend on mutual cooperation between entrepreneurs and venture capitalists, but little is known about what makes these relationships work. The present article considers the implicit similarities between entrepreneurventure capitalist relationships and the Prisoner's Dilemma framework, using this paradigm to develop a conceptual model of entrepreneurs' and venture capitalists' decisions to cooperate. The model is used to generate a number of testable propositions concerning long-term cooperation between entrepreneurs and venture capitalists. Implications of the model for researchers, entrepreneurs, and venture capitalists are discussed, and the paper concludes by examining implications of the entrepreneur-venture capitalist context for the traditional Prisoner's Dilemma framework.
View
Venture Capital Contracting in Theory and Practice: Implications for Entrepreneurship Research
Article
  • Jan 2016
This article provides a comprehensive theoretical and empirical literature review of venture capital contracts. This outlines the differences between theoretical and practical uses of contract designs; that is, (1) how does the choice of securities give rise to different adverse selection problems in terms of attracting different types of entrepreneurial companies; how does the choice of securities in conjunction with cash flow and control rights provisions affect (2) the effort levels by the entrepreneur and the investor; and (3) ultimately affect entrepreneurial outcomes. This article highlights the major discrepancies between theory and practice and points out potential avenues for further research.
View
Entrepreneurs' Financing Choice Between Independent or Bank-Affiliated Venture Capital Firms
Article
  • Mar 2012
  • J CORP FINANC
This paper analyzes how the affiliation of a venture capital firm affects the deal terms for innovative entrepreneurial ventures. We develop a theory to explain the advantages of independent and bank-affiliated venture capital funds for entrepreneurs. In our model, an entrepreneur chooses optimal financing in two stages from either type of venture capitalist. When an independent fund is chosen, we assume the entrepreneur's cost of effort is lower due to more effective support by the venture capitalist. On the other hand, the bank-affiliated firm is less financially constrained which eliminates information asymmetry in the second financing round. The entrepreneur selects the optimal contract by trading-off the benefit of better support by an independent against the advantage of an affiliated firm. The model allows several empirically testable predictions concerning the nature of projects financed by either type of venture capital firm. Entrepreneurs should seek capital from independent or affiliated venture capitalists contingent on the degree of sophistication of their project, their liquidation value, the importance of expected management support, and the remaining time to fundraising.
View
Political Risk, Project Finance, and the Participation of Development Banks in Syndicated Lending
Article
  • Apr 2012
How should loan contracts for financing projects in countries with high political risk be designed? We argue that non-recourse project finance loans and the participation of development banks in the loan syndicate help mitigate political risk. We test these arguments by conducting a study with a sample of 4978 loans made to borrowers in 64 countries. Our results show that if political risk is higher, then project finance loans are more likely to be used, and development banks are more likely to participate in the syndicate. We also show that the terms of the loan contract depend not only on the political risk but also on the legal and institutional environment as well.
View