Information and Control in Ventures and Alliances

This paper develops a theory of control as a signal of congruence of objectives, and applies it to financial contracting between an investor and a privately informed entrepreneur. We show that formal investor control is (i) increasing in the information asymmetries ex ante, (ii) increasing in the uncertainty surrounding the venture ex post, (iii) decreasing in the entrepreneur's resources, and (iv) increasing in the entrepreneur's incentive conflict. In contrast, real investor control-that is, actual investor interference-is decreasing in information asymmetries. Control rights are further such that control shifts to the investor in bad states of nature. Copyright 2005 by The American Finance Association.