Information, learning and decision-making : applications to venture capital finance and strategic management

This thesis comprises three essays dealing with information and learning in business decision-making. The first essay presents a theory explaining the existence of dedicated financial intermediaries (i.e., venture capitalists) who serve the entrepreneurial sector. Building on the well-established idea that informational asymmetries are central in entrepreneurial financing, the main hypothesis is that venture capitalists exist precisely because they develop special expertise in reducing information-based market failures through careful selection, monitoring, and other means. The primary contribution of this chapter lies in linking the theoretical structure to detailed evidence on venture capital investment in Canada. Specifically, the theory suggests four empirical predictions. It is argued that the evidence is consistent with these predictions and therefore with the central hypothesis. In the second essay, two agents, an entrepreneur and a venture capitalist, engage in repeated, ultimatum-style bargaining about a two-dimensional financial contract. They base their offers on simple heuristics, which are processed by a genetic algorithm. The algorithm captures some fundamental principles of human learning. A simulation experiment reveals that with incomplete information, disagreement and delays in bargaining are observed more frequently than under complete information. This can be explained by the sensitivity of agents' learning to information. It is also found that the agent in the weak bargaining position might benefit from incomplete information. The third essay explores a range of hypotheses that might explain differential intra-industry firm performance. A behavioral model is developed in which simple rules guide firms on whether to adapt internally and/or imitate others in order to effect organizational change. This dynamic, multi-period model, in which firms simultaneously compete, is simulated under assumptions which correspond to the hypotheses about differential firm performance. Results reveal that stochastic managerial choice and organizational inertia are plausible sources of differential firm performance. Experiential learning, in and of itself, has only limited influence on heterogeneous firm performance. Interestingly, imitation may be an undesirable strategy for underperforming firms either because it is aimed at a "moving target" or because the targeted market niche is already crowded.