Cumming

Journal of Corporate Finance 11 (2005) 550 – 585 www.elsevier.com/locate/econbase

Capital structure in venture financeB

Douglas J. Cumming*

School of Banking and Finance, University of New South Wales, Sydney, Australia 2052 Department of Finance, School of Business, University of Alberta, Edmonton, AB, Canada T6G 2R6 Department of Business Economics and law, School of Business, University of Alberta, Canada Received 14 November 2002; accepted 14 February 2004 Available online 27 April 2004

Abstract Prior research has argued that convertible preferred equity is the optimal form of venture capital (VC) finance, based on datasets with up to 213 observations from the United States, where unique tax biases exist in favor of convertible preferred. This paper introduces a comparable sample of 3083 Canadian corporate and limited partnership venture financing transactions spanning the years 1991– 2000. The data indicate that a variety of securities are used, and convertible preferred equity has not been the most frequent. Empirical tests offer strong support for the proposition that the mix of financing instruments minimizes the costs arising from a set of agency problems. D 2004 Elsevier B.V. All rights reserved.

JEL classification: G24; G31; G32; G28; G33; G34; G35; G38 Keywords: Venture capital; Capital structure; Financial contracting

Earlier drafts of this paper were distributed under different titles. I am indebted to an anonymous referee for very helpful comments and suggestions. I also owe special thanks to Ralph Winter and Tom Ross for helpful comments. I am also indebted to Varouj Aivazian, Paul Halpern, Aditya Kaul, NyoNyo Kyaw, Ted Liu, Mike Long, Mary Macdonald, Jeff MacIntosh, Frank Mathewson, Vikas Mehrotra, Randall Morck, Enrico Perotti, James Pesando, Corrine Sellars and the seminar participants at the University of Toronto (1998), Canadian Law and Economics Association (1998), Bank of Canada (1999), Lexecon (1999), Northern Finance Association...