Journal Article

Posturing and Holdup in Innovation

Naveen Khanna and Richmond D. Mathews

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 29, issue 9, pages 2419-2454
Published in print September 2016 | ISSN: 0893-9454
Published online November 2015 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hhv071
Posturing and Holdup in Innovation

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  • Information, Knowledge, and Uncertainy
  • Investment Banking
  • Corporate Governance
  • Firm Objectives, Organization, and Behaviour
  • Business and Management
  • Technological Change; Research and Development

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We show that the need to “posture” can help solve the holdup problem inherent in many multistage relationships, including those between entrepreneurs and venture capitalists. Posturing arises when an informed party needs to send a strong signal to induce skeptical third parties like employees, suppliers, customers, or competitors to develop/maintain relationships with the firm or take other actions that increase firm value. In the venture capital context, this can be credibly achieved if the VC publicly invests at high prices in later rounds. This tempers holdup by shifting ex-post bargaining power toward the entrepreneur, inducing him to exert greater effort.

Received February 25, 2014; accepted October 7, 2015 by Editor Itay Goldstein.

Keywords: D86; G24; G32; L22; M13; O30

Journal Article.  17346 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Investment Banking ; Corporate Governance ; Firm Objectives, Organization, and Behaviour ; Business and Management ; Technological Change; Research and Development

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