Why do venture capital firms exist? theory and canadian evidence

EXECUTIVE SUMMARY This paper investigates the role of venture capitalists. We view their raison d'etre as their ability to reduce the cost of informational asymmetries. Our theoretical framework focuses on two major forms of asymmetric informa- tion: hidden information (leading to adverse selection) and hidden ac- tion (leading to moral hazard). Our theoretical analysis suggests four em- pirical predictions. 1. Venture capitalists operate in...