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Entrepreneurial Finance and the Creation of Value: Agency Costs vs. Cognitive Value

Entrepreneurial Finance and the Creation of Value: Agency Costs vs. Cognitive Value
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Author(s): Peter Wirtz (University Jean Moulin Lyon 3, France)
Copyright: 2015
Pages: 17
Source title: Handbook of Research on Global Competitive Advantage through Innovation and Entrepreneurship
Source Author(s)/Editor(s): Luís M. Carmo Farinha (Polytechnic Institute of Castelo Branco & NECE – Research Unit, Portugal), João J. M. Ferreira (University of Beira Interior & NECE – Research Unit, Portugal), Helen Lawton Smith (Birkbeck, University of London & Oxfordshire Economic Observatory, Oxford University, UK) and Sharmistha Bagchi-Sen (State University of New York – Buffalo, Buffalo, NY, USA)
DOI: 10.4018/978-1-4666-8348-8.ch030

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Abstract

The O.M. Scott case study published in 1989 has come to be a classic in modern corporate finance. High leverage traditionally appears as a strong incentive to refrain from sub-optimal investment behavior by self-interested managers. Thus reducing managerial agency cost has been considered as an essential driver of enhanced value in much of financial modeling. The present chapter attempts a somewhat different, albeit complementary, mainly resource based interpretation of the very rich empirical material contained in Baker and Wruck's description of the Scott-LBO. In fact, a close reading of the case suggests that the observed significant increase in operating performance post-LBO is to a great extent the consequence of yet unexplored cognitive changes induced by the private equity firm leading the operation. One may hypothesize that concepts of cognitive value and cognitive cost are relevant to entrepreneurial finance, especially in the case of funding highly innovative young ventures.

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