In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also have a perverse effect of harming banks' franchise values, thus encouraging gambling. Pareto-efficient outcomes can be achieved by adding deposit-rate controls as a regulatory instrument, since they facilitate prudent investment by increasing franchise values. Even if deposit-rate ceilings are not binding on the equilibrium path, they may be useful in deterring gambling off the equilibrium path.

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This paper examines the impact venture capital can have on the development of new firms. Using a hand-collected data set on Silicon Valley start-ups, we find that venture capital is related to a variety of professionalization measures, such as human resource policies, the adoption of stock option plans, and the hiring of a marketing VP. Venture-capital-backed companies are also more likely and faster to replace the founder with an outside CEO, both in situations that appear adversarial and those mutually agreed to. The evidence suggests that venture capitalists play roles over and beyond those of traditional financial intermediaries.

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What Drives Venture Capital Fundraising? DURING THE PAST twenty years, commitments to the U.S. venture capital industry have grown dramatically. This growth has not been uniform: it has occurred in concentrated areas of the country, and peaks in fundraising have been followed by major retrenchments. Despite the importance of the venture capital sector in generating innovation and new jobs, few academic studies have explored the dramatic movements in venture fundraising. In this paper we examine the forces that affected fundraising by independent venture capital organizations from 1972 through 1994. We study both industry fundraising patterns and the success of individual venture organizations. We find that regulatory changes affecting pension funds, capital gains tax rates, overall economic growth, and research and development expenditures, as well as firm-specific performance and reputation, affect fundraising. The results are potentially important for understanding and promoting venture capital investment.

Venture capitalists often hold extensive control rights over entrepreneurial companies, including the right to fire entrepreneurs. This paper examines why, and under what circumstances, entrepreneurs would voluntarily relinquish control. Control rights protect the venture capitalists from holdup by the entrepreneurs. This provides the correct incentives for the venture capitalists to search for a superior management team. Wealth-constrained entrepreneurs may give up control even if the change in management imposes a greater loss of private benefit to them than a monetary gain to the company. The model also explains why entrepreneurs accept vesting of their stock and low severance.

This paper examines the determinants and consequences of investor activism in venture capital. Using a hand-collected sample of European venture capital deals, it shows the importance of human capital. Venture capital firms with partners that have prior business experience are more active recruiting managers and directors, helping with fundraising, and interacting more frequently with their portfolio companies. Independent venture capital firms are also more active than 'captive' (bank-, corporate-, or government-owned) firms. After controlling for endogeneity, investor activism is shown to be positively related to the success of portfolio companies. Forthcoming, Journal of Financial Economics * We are grateful to all the venture capital firms which provided us with data. We thank Christo

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