DOI: 10.1111/fima.70075 ISSN: 0046-3892
Entrepreneurial Optimism and Venture Capital: A Quantitative Analysis
Richard Fu, Ajay SubramanianABSTRACT
We quantitatively analyze the impact of entrepreneurial (EN) optimism on venture capital (VC) projects in a dynamic calibratable model. VCs and entrepreneurs (ENs) have differing beliefs and risk attitudes about projects. The equilibrium features staged VC investments, progressive vesting of the EN's stake, and intertemporal performance targets. Optimism is a major driver of VC projects. The EN's mean project quality assessment is over twice the VC's mean assessment. Optimism increases pay‐performance sensitivities by 75% and almost doubles project values. We derive quantitative implications for the effects of optimism, project qualities, productivities, and risks on VC contracts and project values.