The transaction cost implications from business angel ownership in the Caribbean

Abstract

Research question/issue

This is a study of the relationship between business angel retained ownership in investee firms across the Caribbean region and their informational asymmetry costs captured in bid-ask spreads.

Research findings/insights

We find business angel ownership to be associated with a reduction in transaction costs or bid-ask spreads. However, this is reversed leading to increasing transaction costs following moderation by whether the investee firm has a subsidiary located within an offshore jurisdiction and separately if the investee firm adopts higher levels of Anglo-American shareholder value corporate governance.

Theoretical/academic implications

We undertake a novel application of incomplete contracting theory in theorizing the influence of ownership of business angels on the transaction costs of their investee firms. We extend and contribute to theory development through consideration of the presence of investee firm's subsidiary located in offshore financial centers within the firm's corporate network and the degree to which it adopts Anglo-American shareholder value corporate governance. In the former, we argue business angels are more prone to collaborate with firm insiders to the detriment of outside minority investors given the enhanced opacity and shift in incentives. In the latter, we argue the incongruity between business angels, insiders, and outside minority expectations regarding the adoption of shareholder value governance also leads to elevated transaction costs.

Practitioner/policy implications

Business angel finance is widely lauded as a potential source of development capital within regional and developing economies with the potential to rejuvenate otherwise moribund entrepreneurial ecosystems and business sectors. Our study yields important findings relevant for practitioners in formulating development policy nurturing the development of indigenous economies through enhanced business angel participation. It also considers the moderating influence of firm's adoption of Anglo-American shareholder value corporate governance and whether the firm has a related party located in an offshore financial center, something of profound importance in regions comprising offshore financial centers.