This dissertation analyzes the effect of control benefits on equity investment decisions. It first develops an extension of the classic dividend discount models that differentiates the value of cash ...flows to the firm and the distribution of these cash flows among shareholders. The single stock valuation model is incorporated into the optimal equity portfolio problem of a large investor. The solution counterweighs the benefits of higher returns through private benefits of control and monitoring efforts when an investor purchases a large equity block with the costs of bearing diversifiable risk. The model predicts that budget-constrained investors will be more likely to buy controlling blocks in smaller firms, and in firms where higher private benefits of control can be secured. The dissertation afterwards presents empirical evidence regarding the predictions of the developed equity valuation and portfolio optimization theory. Using a unique data set containing the valuation of large investors for equity blocks, the existence of private benefits of control for different sized blocks is documented. Further exploration of the determinants of portfolio choices reveals that institutions prefer to obtain large blocks in smaller firms, and in firms located in their geographical proximity. Investors with more capital are more likely to bid for large blocks and to form bidding coalitions. The results are strongly consistent with the hypotheses advanced in the theoretical part of the dissertation.
Venture capital contracts give VCs enormous power over entrepreneurs and early equity investors of portfolio companies. A large literature examines how these contractual terms protect VCs against ...misbehavior by entrepreneurs. But what constrains misbehavior by VCs? We provide the first systematic analysis of legal and non-legal mechanisms that penalize VC misbehavior, even when such misbehavior is formally permitted by contract. We hand-collect a sample of over 177 lawsuits involving venture capitalists. The three most common types of VC-related litigation are: 1) lawsuits filed by entrepreneurs, which most often allege freezeout and transfer of control away from founders; 2) lawsuits filed by early equity investors in startup companies; and 3) lawsuits filed by VCs. Our empirical analysis of the lawsuit data proceeds in two steps. We first estimate an empirical model of the propensity of VCs to get involved in litigation as a function of VC characteristics. We match each venture firm that was involved in litigation to otherwise similar venture firm that was not involved in litigation and find that less reputable VCs are more likely to participate in litigation, as are VCs focusing on early-stage investments, and VCs with larger deal flow. Second, we analyze the relationship between different types of lawsuits and VC fundraising and deal flow. Although plaintiffs lose most VC-related lawsuits, litigation does not go unnoticed: in subsequent years, the involved VCs raise significantly less capital than their peers and invest in fewer deals. The biggest losers are VCs who were defendants in a lawsuit, and especially VCs who were alleged to have expropriated founders.
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