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Title: Three essays on investment under uncertainty
Author: Güçbilmez, Ísmail Ufuk
Awarding Body: Lancaster University
Current Institution: Lancaster University
Date of Award: 2010
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This thesis contains three essays on investment under uncertainty. The first essay in Chapter 2 provides a theory of debt and equity commitments based on the entrepreneur's investment incentives. In this essay, we compare two fundamental ways of financing investments. The first way is to secure financing in advance (i.e., before the investment) via an investor's debt or equity commitment. The second way is to obtain financing on spot (i.e., at the time of investment). We find that the entrepreneur's choices between debt and equity, and between commitment and spot financing depend on his bargaining power and his ability to extract private benefits. The entrepreneur considers spot financing only when he has full bargaining power. He is indifferent between spot debt and equity. Spot financing is efficient, as the entrepreneur exercises his option to invest at the first-best investment threshold. The entrepreneur strictly prefers commitment financing when he does not have full bargaining power. He prefers equity commitment if he is skilled in extracting private benefits at a small dead weight cost. In this case, he invests too early and causes a reduction in firm value. Otherwise, he prefers debt commitment and invests too late and again causes a reduction in firm value. Our findings help explain the capital structure of firms at different stages in their life cycle. The second essay in Chapter 3 focuses on timing of initial public offerings (IPO) in a hot issue market. We explain why some private firms lead a hot IPO market by going public early, while others follow by delaying their IPOs until late in the same market. In our model, g60d firms go public early. at the expense of issuing underpriced shares, in order to enjoy a first-mover advantage. We find evidence for our arguments in the U.S. IPQ market. Early IPOs of a hot market are underpriced more severely on average, but they experience higher growth in sales, assets, EBITDA, and capital expenditure. Moreover, their shares outperform the market up to nine months after their issues, while those of late IPOs underperform the market from the start. The third and final essay in Chapter 4 deals with optimal venture capital contracting when an entrepreneur and a venture capitalist can both exert value-adding effort that is privately costly for them. We derive the optimal contract when the effort provided by the parties increase the project 's probability of success. The costly effort each party exerts depends on the terms of financial contract the parties sign. We compare three financial contracts: common stock, straight preferred stock, and convertible preferred stock. We find that each of these contracts can be optimal depending on the terms. We show that there are cases in which common stock is infeasible and convertible preferred stock can facilitate financing. We also discuss the inclusion of a clause that prevents the venture capitalist from converting his preferred stock in the case of failure, and argue that this clause can increase efficiency.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available