Entrepreneurial Financing, Advice, And Agency Costs

This paper studies the interplay between advice and agency costs in entrepreneurial financing. Advice exacerbates agency problems, because the agent may use it at the investor's disadvantage. Depending on the magnitude of the agency problem, optimal financing relationships may induce full, partial, or no advice. Because the trade - off is delicate, investors need to control the information flow carefully. This explains the dual role of financing and consulting by investors in entrepreneurial financing.