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Many venture capitalists (VCs) use the “VC method” of valuation where they use judgment to estimate a probability of successful exit while determining the ownership share to demand in exchange for investing in a venture. However, prior models are not aligned with the “VC method” because they do not consider private information about entrepreneurial characteristics, the primary drivers of the above probability, and consequently do not model judgment. The three main chapters of this thesis—one theoretical, one simulation, and one empirical study—examine the venture capital deal process in sync with the “VC method.” Chapter 2 is theoretical and develops a principal-agent model of venture capital deal process incorporating double-sided moral hazard and one-sided private information. The VC is never fully informed about the entrepreneur’s disutility of effort in spite of due diligence checks, so takes on a belief about the latter’s performance in the funded venture to determine the offer. This study suggests that there exists a critical point in the VC’s belief—and correspondingly in the VC’s ownership share—that maximizes the total return to the two parties. It also uncovers optimal revision strategies for the VC to adopt if the offer is rejected where it is shown that the VC should develop a strong advisory capacity and minimize time constraints to facilitate investment. Chapter 3 simulates venture capital deals as per the theoretical model and confirms the existence of critical points in the VC’s belief and ownership share that maximize the returns to the two parties and their total return. Particularly, the VC’s return (in excess of his or her return from an alternate investment) peaks for a moderate ownership share for the VC. Since private information with the entrepreneur would preclude the VC from knowing these critical points a priori, the VC should demand a moderate ownership share to stay close to such a peak. Using data from simulations, we also generate predictions about the properties of the venture capital deal space—notably: (a) Teamwork is crucial to financing; and (b) If the VC is highly confident about the entrepreneur’s performance, it would work to the latter’s advantage. Chapter 4 reports the results from our survey of eight seasoned VCs affiliated with seven firms operating in Canada, USA, and UK, where our findings received a high degree of support.

Many venture capitalists (VCs) use the “VC method” of valuation where they use judgment to estimate a probability of successful exit while determining the ownership share to demand in exchange for investing in a venture. However, prior models are not aligned with the “VC method” because they do not consider private information about entrepreneurial characteristics, the primary drivers of the above probability, and consequently do not model judgment. The three main chapters of this thesis—one theoretical, one simulation, and one empirical study—examine the venture capital deal process in sync with the “VC method.” Chapter 2 is theoretical and develops a principal-agent model of venture capital deal process incorporating double-sided moral hazard and one-sided private information. The VC is never fully informed about the entrepreneur’s disutility of effort in spite of due diligence checks, so takes on a belief about the latter’s performance in the funded venture to determine the offer. This study suggests that there exists a critical point in the VC’s belief—and correspondingly in the VC’s ownership share—that maximizes the total return to the two parties. It also uncovers optimal revision strategies for the VC to adopt if the offer is rejected where it is shown that the VC should develop a strong advisory capacity and minimize time constraints to facilitate investment. Chapter 3 simulates venture capital deals as per the theoretical model and confirms the existence of critical points in the VC’s belief and ownership share that maximize the returns to the two parties and their total return. Particularly, the VC’s return (in excess of his or her return from an alternate investment) peaks for a moderate ownership share for the VC. Since private information with the entrepreneur would preclude the VC from knowing these critical points a priori, the VC should demand a moderate ownership share to stay close to such a peak. Using data from simulations, we also generate predictions about the properties of the venture capital deal space—notably: (a) Teamwork is crucial to financing; and (b) If the VC is highly confident about the entrepreneur’s performance, it would work to the latter’s advantage. Chapter 4 reports the results from our survey of eight seasoned VCs affiliated with seven firms operating in Canada, USA, and UK, where our findings received a high degree of support.

Firm valuation by using DCF FCFF method. Macro-economic analysis, financial analysis, strategy analysis of firm, drawing up a financial plan. Software Stratex v. 5.2.04 and Evalent v. 3.6.01.

This dissertation consists of two essays, both co-authored with Ugur Lel. The first essay (Chapter 1) examines whether high CEO pay inequality (CPI), the share of total managerial pay captured by the CEO, is an outcome of poor corporate governance, and its implications for shareholder wealth. We exploit the 2002 NYSE and NASDAQ governance reforms that mandated firms to have majority independent boards as a quasi-exogenous source of variation in the internal governance environment of firms. Results show that CPI decreases following the passage of these exchange listing regulations, but only in firms with entrenched CEOs affected by the exchange listing regulations. Firm value also increases for these firms. These results are robust to a variety of robustness checks such as a matched sample analysis and placebo tests. Overall, our results suggest that poor governance environments are associated with high managerial pay differences and consequently lower firm valuations, supporting the view that high CEO pay inequality reflects managerial entrenchment. The second essay (Chapter 2) examines whether shareholders use executive compensation channel to align managerial horizon with their investment horizon. We utilize a newly emerged empirical measure, pay duration, to measure managerial horizon. For shareholder horizon, we use the fraction of long-term institutional ownership in the firm. Results show that there is a positive association between long-term institutional ownership and CEO pay duration, suggesting that shareholder horizon is a determining factor in compensation contracts. We address reverse causality using indexer institutions. We also establish a causal link from investor horizon to CEO pay duration using institution mergers as a source of exogenous variation in investor horizon of the firm. We extend our results to hedge fund activism and document a negative relation between hedge fund activism and pay duration, which is consistent with our argument. Overall our results suggest that shareholders structure CEO pay in a way that is consistent with their investment horizon. / Ph. D. / CEOs play a crucial role in today’s financial world. They are the ultimate decision makers in companies and their goal is to maximize the shareholder wealth. Motivating the CEO to work hard and maximize shareholder wealth hinges on optimally designed compensation contracts. Shareholders delegate company directors to design these pay contracts. However, conflicts of interest between directors and CEOs, between shareholders and CEOs, and even among shareholders, affect the design of CEO pay contracts. It is important to study these conflicts of interest and their effect on CEO compensation to ensure well-functioning companies and a fair market. The objective of the first chapter is to examine whether the CEOs are overpaid when the company directors are not able to monitor the actions and decisions of the CEOs. We document that powerful and established CEOs are overpaid, both in dollar terms and relative to other managers in the company, when they are not properly monitored. We also document that regulations that aim to improve monitoring quality in companies bring CEO pay to fair levels, leading to an increase in company valuations. These findings point out the importance of regulations that improve the governance of companies. In the second chapter, we examine short-termism (or myopia) in the context of CEO pay. Basically, short-termism is any action that saves today but is costly in future. While short-term shareholders invest in companies for short periods to take advantage of temporary changes in company valuation, long-term investors invest for long periods and aim to benefit from long-term increase in company valuation. We document that the conflict of interest among shareholders with different investment periods is reflected in the design of CEO pay contracts. In particular, CEOs wait more to receive their compensation if the dominant investor type in the company has longer investment period. This finding explains how shareholders use CEO compensation to achieve wealth maximization, highlighting the power and importance of CEO pay contracts.

In the last two decades, corporate governance rules in Sweden have been arguably improved, giving more protection to minority owners. We thus investigate the impact of dual-class shares on firm valuation on the Swedish stock exchange. Companies from Nasdaq Stockholm are observed during the years 2018-2022, where an OLS regression analysis is made to explore the relationship of the firm valuation measurement Tobin’s Q and other firm variables. Based on regression analysis we do not find an association between the categorical dual-class share structure and Tobin's Q. However, we find a negative association between size of the wedge - the divergence between voting and cash flow rights of the largest owner - and Tobin's Q, attributed to agency costs.

The master's thesis focuses on retail company Koruna, s. r. o. valuation by using income-based methods of discounted cash flows of an entity and economic value added. The thesis is divided into two main parts. The first part defines the theoretical basis of the thesis and the second part deals with the practical application of knowledge to the specific company. The practical part contains strategic and financial analysis and application of income-based methods which leads to the determination of the company's value to the 1. 1. 2016.

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