Three essays in financial contracting

This dissertation brings together three essays on three different contracting problems: The first essay develops a framework to explain the use of ‘convertible security’ in venture capital investments, a financial instrument that combines a debt component with a conversion into equity option. I describe a contract problem where the optimal contract must provide insurance for the venture capitalist and also induce the entrepreneur the choice of low risk business strategy. In this context, convertible debt is optimal: The debt portion insures the venture capitalist against the downside risk, while the conversion into equity option prevents the entrepreneur from increasing risk ex post.; The second essay focuses on another feature of venture capital investments; staging the infusion of capital. Rather than providing up-front all the capital a venture needs to achieve its business plan, venture capitalists invest in ventures at distinct stages of their development. I describe a model of investment under uncertainty where staging arises as an endogenous financing schedule out of the bargaining between an entrepreneur and a venture capitalist. The equilibrium schedule involves the venture capitalist providing only a portion of required capital initially, and leaving the continuation decision to a future date where parties receive information on venture's profitability.; Third essay considers the problem of a monopolistic seller of asset return information in financial markets and captures two aspects of information: First, in a noisy rational expectations framework, equilibrium asset price partially conveys information to uninformed traders. Second, the quality of information is not observable to buyers. Since producing precise information is costly, the seller must overcome a moral hazard problem by offering a contract that convinces the market about her precision. I study the performance of a quadratic payment schedule that combines a fixed fee minus a forecast error component. This contract provides incentives to the seller to produce precise information but it also distorts the portfolio choice of the informed investors by causing them to hold larger positions on the asset. This distortion makes the equilibrium asset price more informative and decreases the value of precise information. Therefore, the incentive device the seller employs turns out to destroy incentives to provide precise information.