NATIONAL BUREAU OF ECONOMIC RESEARCH
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May the Force be With You: Investor Power and Company Valuations

Thomas Hellmann, Veikko Thiele

NBER Working Paper No. 25211
Issued in November 2018
NBER Program(s):The Corporate Finance Program

This paper examines the effect of investor power in a model of staged equity financing. It shows how the usual effect where market power reduces valuations can be reversed in later rounds. Once they become insiders, powerful investors may use their market power to increase, not decrease valuations. Even though powerful investors initially lower valuations, companies prefer to bring them inside to leverage their power in later financing rounds. The paper also makes predictions about investor returns, and issues a warning that unrealized interim returns can be misleading predictors of final realized returns when powerful investors distort interim valuations.

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Document Object Identifier (DOI): 10.3386/w25211

 
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