The financing innovation in entrepreneurship and hedge funds

Zhang, Hai (2017) The financing innovation in entrepreneurship and hedge funds. PhD thesis, University of Glasgow.

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Abstract

This thesis has developed appropriate dynamic models to shed more light on how pervasive innovation (e.g., equity-for-guarantee swaps) in entrepreneurship/hedge funds could alleviate the severe financing constraints for entrepreneurs/hedge fund managers who plan to launch new businesses. Chapter 2 considers a risk-averse entrepreneur who invests in a project with idiosyncratic risk and takes debt financing via equity-for-guarantee swaps for diversification benefits. In contrast to the literature, we assume the entrepreneur is unable to get a loan from a bank directly because of the low credibility of the entrepreneur and lack of collateral and therefore, an innovative financial contract, equity-for-guarantee swaps, is signed among a bank, an insurer, and the entrepreneur. The new swap not only solves the serious problems of widespread financing constraints, but also significantly improves the welfare level of the entrepreneur. Chapter 3 develops a new financial derivative product called fees-for-guarantee swap to alleviate financing constraints of ESFs managers as well as mitigate the manager’s risk shifting behaviour. Numerical results indicate that the incentive compensation, managerial ownership and the possibility of fund liquidation significantly mitigate the manager’s risk shifting incentive. In Chapter 4, a dynamic valuation model of the hedge fund seeding business has been built to study the consumption and portfolio choice problem for a risk-averse manager who launches a hedge fund via a seeing vehicle. This vehicle, i.e. fees-for-seed swap, specifies that a strategic partner (seeder) provides a critical amount of capital in exchange for participation in the funds revenue. If structured properly this seeding vehicle could lead to Pareto improvement, as it alleviates the ESFs manager’s financial constraint, helps seeder get high potential return for good performance and ordinary investors are more willing to invest in funds backed up by seeding investment.

Item Type: Thesis (PhD)
Qualification Level: Doctoral
Additional Information: Chapter 2 has been published in European Journal of Operational Research, see Wang, Yang and Zhang (2015). Chapter 4 has been published in Journal of Economic Dynamics and Control, see Ewald and Zhang (2016).
Keywords: Borrowing Constraints, Equity-for-Guarantee Swap, Capital Structure, Cash-out Option, Hedge Fund seeding, Fees-for-seed swap, Fees-for-guarantee swap, HWM, Risk-shifting incentive, and Real options
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Colleges/Schools: College of Social Sciences > Adam Smith Business School > Economics
Funder's Name: UNSPECIFIED
Supervisor's Name: Ewald, Professor Christian Oliver
Date of Award: 2017
Depositing User: Mr Hai Zhang
Unique ID: glathesis:2017-7912
Copyright: Copyright of this thesis is held by the author.
Date Deposited: 10 Feb 2017 10:37
Last Modified: 07 Mar 2017 10:43
URI: http://theses.gla.ac.uk/id/eprint/7912

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