GAS NATURAL

The traditional financial theory is focused on the production process. Financing fulfils a support function to enable the production process (Rudolph 2006). The amount of investment capital depends on the demand in the production process. The theory considers enterprises as social organisations in order to produce goods and services according to the economic principle. Hence, enterprises are concerned with satisfying the needs of both private households and enterprises without wasting resources. In the following periods, the economic theory left the path of demand-oriented goods production. Production processes were optimised in order to realise competitive advantages by mass production. This phase of industrialisation was accompanied with the origin of large banks, which ensured the future economic development. Nevertheless, the earlier orientation on goods flow, as the basis for financing decisions, was still valid. In the subsequent periods, market saturation due to mass production required both the optimisation of the production and the financing process. Hence, the overall economic development during the periods after the past war laid the basis for the modern financial orientation. Since then, investment decisions are realised from a profit point of view (Schmidt and Terberger 1997). The traditional financial orientation denies the issue of profit maximisation. The modern orientation, on the contrary, considers enterprises as institutions to maximise profits from entrepreneurs and investors (Rudolph 2006). This financial orientation is concerned with two different theories, the neo-classical theory on the one hand and the neo-institutional theory on the other hand. Both theoretical orientations are clarified in greater detail in the subsequent sections.

3.1.1 The neo-classical financial theory

The neo-classical financial theory is based on the assumptions of both complete and perfect capital markets. Capital markets are perfect under the following assumptions:

equal interest rates for savings and credits;

non-limited capital consumption for every market participant; free capital market access;

no taxes and transaction-costs;

equal information level of market participants;

every type of cash-flow is divisible, tradable and assessable (Rudolph 2006).

On the other hand, capital markets are imperfect if transaction-costs result in differences between sales and purchase prices. In incomplete capital markets on the other hand, the tradability of specific financing measures is not possible and thus such markets suffer from financing gaps. Nevertheless, capital markets only address and solve divergent financial preferences. Non- financial preferences of market participants are not considered and could not be solved (Schmidt and Terberger 1997).

3.1.2 The neo-institutional financial theory

The theory denies the assumption of perfect and complete capital markets. Market protagonists behave rationally and follow subjective aims in order to maximise their profits (Rudolph 2006). Difficulties in the market are caused by information asymmetries between market participants. Therefore, suitable institutions are required to handle these information asymmetries. These institutions are associated with transaction costs. Depending on their specific amount, some transactions are not carried out. In that case, capital markets are classified as incomplete. Therefore, the neo-institutional theory is concerned with the analysis of organisations or institutional frameworks, regarding their suitability to settle information risks (Schmidt and Terberger 1997). The analysis is focused on suitable contracts, incentive measures and institutions (Rudolph 2006). Even though the neo-institutional theory denies the existence of both perfect and complete capital markets, the theory tries to come closer to perfect conditions by developing most suitable institutional frameworks (Schmidt and Terberger 1997).

The neo-institutional theory is associated with the following theoretical orientations:

the theory of property-rights; the principal agent theory;

the issue of transaction-costs;

the contract theory (Schefczyk 2004).

The examination process of the neo-institutional theory is focused on first best solutions without transaction-costs. Second best solutions, as a result of transaction-costs, could be improved by effective institutional frameworks. Therefore, the analysis process of the theory is not solely concerned with direct relationships but also considers financial intermediaries in order to receive virtually first best solutions. Even though different in their approach, each perspective is concerned with institutional frameworks to handle risks and to avoid or to reduce transaction- costs (Schmidt and Terberger 1997).

The subsequent section clarifies the particularities of each approach.

3.1.3 The components of the neo-institutional financial theory

The theory of property-rights is focused on the analysis of rights on goods and services. In that respect, contract rights refer to the use, the earnings, the modification or the disposal of goods and services (Rudolph 2006). According to the property-rights theory, the contract serves as the institution to allocate particular rights and obligations of each contract partner (Schmidt and Terberger 1997). As the value of goods and services is also determined by property-rights, the theory analysis contract’s efficiency (Rudolph 2006). Inefficiencies are caused by the distribution of property-rights between contract partners. With regard to the analysis of contracts, different constellations of property-rights are compared on the basis of their individual transaction-costs (Schefczyk 2004).

The principal-agent theory, on the other hand, is focused on the relationship between the principal and the agent. Under the assumption of different information levels between contract partners, relationships are uncertain. In that context, investors are always exposed to the risk that agents are focused on the maximisation of their own profits rather than on firm’s interests. The principal-agent theory is therefore focused on the analysis of risks due to information asymmetry and recommends suitable contract designs (Brunner and Kehrle 2012).

adverse selection; moral hazard;

hold up (Brunner and Kehrle 2012).

In the case of adverse selection, the agent benefits from an information advantage (Rudolph 2006). The principal is unable to assess the real quality of a good or service on the market (Schmidt and Terberger 1997). The issue of adverse selection is based on Akerlof’s (1970) lemons theory regarding the used car market. He argues that good car qualities would withdraw from the market as potential customers, due to the information gap, are unable to assess the real quality of a car. Consequently, their bid prices are based on average quality assumptions and do not reflect the full value of a specific car. Due to different price expectations, the vendors of high-quality cars are withdrawing from the market. Thus, the customers are exposed to the risk of negative selection due to the remaining poor quality cars (Rudolph 2006). The issue of moral hazard, on the other hand, describes the principal’s uncertainty regarding the agent’s behaviour in the post-contract phase (Brunner and Kehrle 2012). This uncertainty refers to the reduction of agent’s work performance or consumption on the job (Rudolph 2006). The issue of hold up is a further phenomenon in the post-investment phase. In that respect, there is always the risk of opportunistic behaviour of the contract partners due to contract gaps. Hold up describes a situation in which one contract partner could threaten with a contract termination in the case that contract conditions are not improved. This risk is most relevant in the case of very specific investments whose alternative use is impossible (Brunner and Kehrle 2012).

With regard to the PE and VC market, PE and VC firms are also exposed to these risks of adverse selection, moral hazard and hold up. In order to address these risks, Klier et al. (2009) point out that deep industry knowledge is suitable to reduce the problem of asymmetric information. They argue that well informed investors are able to create a situation of both empathy and trust more easily. In addition, the reputation as an informed investor supports the process of deal origination in networks. Furthermore, Klier et al. (2009) argue that informed investors are able to understand the business and strategy of their portfolio companies more efficiently. Therefore, Klier et al. (2009) point out that agency costs could be reduced due to the focus on particular industry lines. Agency difficulties in PE and VC markets are typically associated with the misjudgement of agent’s qualification and motivation, consumption on the job and entrepreneur’s exaggeration regarding the enterprise’s future development (Schefczyk 2004). As the principal-agent theory is focused on moral hazard (Schmidt and Terberger 1997),

the theory supports the development of incentive measures to reduce agency costs (Rudolph 2006). Moon (2006) stresses the development of incentive plans as a key part in the investment process of PE and VC firms. This is required as necessary in order to align the interests between shareholders and the management team. Additional incentives could be paid in the case of extraordinary performance of the management team. Incentives are regarded as essential for an effective corporate governance of the portfolio company. In addition, the management team could be obliged to invest own funds. In that case, the management team directly participates on value creation or value losses, beside the performance-based linkage of their own income (Klier et al. 2009).

The transaction-cost theory is based on the work of Coase (1937) and focused on the advantages of internal in comparison to external production. Under the assumption that external production generates additional costs, these additional expenses could be compensated by the advantage of internal production. Further developed by Williamson (1975) into a contract theory, the transaction-cost theory distinguishes between ex ante and ex post transaction-costs. Ex ante costs are depending on the negotiation of contracts. Post-investment costs on the other hand, are caused by monitoring and the renegotiation of contracts. The basic assumptions of this theory are concerned with limited rationality and opportunistic behaviour. As contract partners are unable to assess every possible consequence, contracts are incomplete. Therefore, contracting parties could take advantage of contract’s incompleteness. Additional transaction-costs arise in the case of legal enforcement and the renegotiation of contracts. In order to reduce such additional expenses, the theory is focused on the analysis of suitable institutions and contracts (Brunner and Kehrle 2012). The amount of transaction-costs is dependent on the uncertainty, the frequency and the specificity of transactions. The degree of these determinants is addressed by different types of institutional arrangements and contracts. A major concern is the issue of investment specificity. This means that there is always a risk of sunk costs due to specific investments as an alternative use would not compensate possible losses. In financial relationships, the so-called theory of incomplete contracts is concerned with possible risks due to specific investments and the renegotiation of contracts (Rudolph 2006). Schefczyk (2004) remarks that VC and PE related contracts are incomplete contracts. This type of investment requires renegotiation and monitoring, and thus produces transaction costs. The application of the neo-institutional financial theory is also described in appendix I (see figure eight).

The theory application is discussed in the subsequent sections. Therefore, earlier doctoral researchers are initially evaluated which finally results in the development of the theoretical framework of the present thesis.