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Founders may be reluctant to take on so much risk. Founders typically invest a large percentage of their human and financial capital into their startups and consequently are unable to diversify firm-specificrisk. In our model, VCs address the divergence in risk preference by striking an implicit bargain with founders.
Most observers agree that they have little to gain from firm-specific activism and have no incentive to reduce fraud because diversification protects them from firm-specificrisk. We cannot expect this relationship to change with the rise of institutional investors, especially passive ones following an index.
Controllers may limit managerial agency costs, but their self-interest produces so-called controlling shareholder agency costs. [2] 3] A specialized financial intermediary, the asset manager, has exploded in significance. [4]
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