Venture Capital Financing in Germany : The Role of Contractual Arrangements in Mitigating Incentive Conflicts

Using a hand-collected sample of contracts and investment proposals from German venturecapital financing relationships, we analyze specific incentive conflicts. We apply indirect anddirect measures of these problems and extend the “direct” approach by Kaplan and Strömberg(2004) to a four- instead of a three-factor analysis. This enables us to distinguish better be-tween hidden action and hold-up problems. Moreover, we find several differences betweenour German sample and the results of US studies that may be caused by the different role ofdebt finance. Furthermore, the superiority of direct indicators is more pronounced for Ger-many than for the US.