Working Paper: NBER ID: w25211
Authors: Thomas Hellmann; Veikko Thiele
Abstract: This paper examines the effect of investor power in a model of staged equity financing. It shows how the usual effect where market power reduces valuations can be reversed in later rounds. Once they become insiders, powerful investors may use their market power to increase, not decrease valuations. Even though powerful investors initially lower valuations, companies prefer to bring them inside to leverage their power in later financing rounds. The paper also makes predictions about investor returns, and issues a warning that unrealized interim returns can be misleading predictors of final realized returns when powerful investors distort interim valuations.
Keywords: Investor Power; Company Valuations; Staged Equity Financing
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investor Power (G34) | Company Valuations (G32) |
| Powerful Outsider (Y60) | Company Valuations (G32) |
| Powerful Insider (Y50) | Company Valuations (G32) |
| First Round Valuations (D44) | Company Valuations (G32) |
| Powerful Insider Participation (G34) | First Round Valuations (D44) |
| Powerful Insider (Y50) | Second Round Valuations (D44) |
| Aggressive Outsider Logic (K49) | First Round Valuations (D44) |
| Defensive Insider Logic (D80) | Second Round Valuations (D44) |
| Powerful Insiders (D73) | Returns to Investors (G12) |
| Competitive Investors (G11) | Returns to Investors (G12) |