Islamic Economics

Islamic Economics

Information Asymmetry in Venture Capital:Study on Shirkah and Mudhaarabah

Document Type : Original Article

Authors
Mehrnaz Heidari
Parastoo Mohammadi
Abstract
One of the most challenging steps of venture capital process is contracting between investor and entrepreneur. This challenge is the result of unpredictable future of partnership, difficult valuation of entrepreneur's intangible assets and information asymmetry between participants. So there had been created diverse controlling and incentive methods in deal completion to minimize future challenges. Among Islamic financial contracts (Uqud), Shirkah (Mushaarakah) and Mudhaarabah has the most similarity to venture capital contracts. As choosing a specific framework for contracting, influences interacts between entrepreneur and venture capital, the main purpose of this article is considering these influences for choosing suitable Islamic contract framework, which reduces agency problem. This study shows Shirkah (Mushaarakah) contract can better confront agency problem from the viewpoint of contract termination, guaranteeing in case of loss and time limit of contract.
Keywords
Venture Capital
Shirkah (Mushaarakah)
Mudhaarabah
Information Asymmetry
Agency Problem
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