We estimate the impact of venture capital (VC) contract terms on startup outcomes and the split of value between the entrepreneur and investor, accounting for endogenous selection via a novel dynamic search-and-matching model. The estimation uses a new, large data set of first financing rounds of startup companies. Consistent with efficient contracting theories, there is an optimal equity split between agents, which maximizes the probability of success. However, venture capitalists (VCs) use their bargaining power to receive more investor-friendly terms compared to the contract that maximizes startup values. Better VCs still benefit the startup and the entrepreneur due to their positive value creation. Counterfactuals show that reducing search frictions shifts the bargaining power to VCs and benefits them at the expense of entrepreneurs. The results show that the selection of agents into deals is a first-order factor to take into account in studies of contracting.

We use new hand-collected data from corporate filings to study the drivers of corporate capital structure adjustment. Classifying firms by their adjustment frequencies, we reveal previously unknown patterns in their reasons for financing and the financial instruments used. Some are consistent with existing theory, whereas others are understudied. Many leverage changes are outside of the firm’s control (e.g., executive option exercise) or incur negligible adjustment costs (e.g., credit-line usage). This implies a lower frequency of proactive leverage adjustments than indicated by prior research using accounting data, suggesting that costs of adjustment are higher, or the benefits lower, than previously thought.