The transaction cost implications from business angel ownership in the Caribbean

• Published date: 01 September 2024
• Author: Bruce Hearn,Venancio Tauringana,Collins Ntim
• Date: 01 September 2024
• DOI: http://doi.org/10.1111/corg.12571

ORIGINAL ARTICLE

The transaction cost implications from business angel

ownership in the Caribbean

Bruce Hearn | Venancio Tauringana | Collins Ntim

Southampton Business School, University of

Southampton, Highfield Campus,

Southampton, UK

Correspondence

Bruce Hearn, Southampton Business School,

University of Southampton, Highfield Campus,

Southampton SO17 1BJ, UK.

Email: b.a.hearn@soton.ac.uk

Funding information

The authors declare no funding has been

received in association with this

research work.

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 informa-

tional 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 devel-

opment 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 for-

mer, 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 gov-

ernance also leads to elevated transaction costs.

Practitioner/policy implications: Business angel finance is widely lauded as a poten-

tial 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 for-

mulating development policy nurturing the development of indigenous economies

through enhanced business angel participation. It also considers the moderating influ-

ence 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.

Received: 25 November 2022 Revised: 9 December 2023 Accepted: 11 December 2023

DOI: 10.1111/corg.12571

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.

© 2024 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

786 Corp Govern Int Rev. 2024;32:786–813.

wileyonlinelibrary.com/journal/corg

KEYWORDS

blockholder ownership, Caribbean, corporate governance rating/index, emerging economies,

governance environments

“Par maytay toot zay woo un yon panier”

[St. Lucian Kweyol]

“Do not put all your eggs in one basket”

1|INTRODUCTION

Business angels (BAs) have been accorded an important disinterme-

diated early-stage financing role within entrepreneurial ecosystems

with the capacity to bridge “funding gaps”(Wilson et al., 2019) for

firms after having exhausted funding from friends and family and

before being able to access more formalized investment. Their

involvement in firms is distinctive in being far broader in remit than

merely capital infusions and encompasses their own business acumen

shaping the nurturing and mentorship of entrepreneurs and investee

recipients. This has led to a rapid recent expansion in BA financing

worldwide, which has not been mirrored by the accompanying litera-

ture with this almost wholly focusing on large, developed economies,

such as the United States and Europe. This is especially problematic

given the potential for BA stimulated economic rejuvenation in devel-

oping economies (Cumming et al., 2018) and given these are typically

subsumed within dense social networks in the light of institutional

voids. This motivates our study to focus on the transaction cost impli-

cations from BA ownership within investee firms.

Our study focusses on the understudied Caribbean region, which

mirrors emerging and developing economies worldwide in being sub-

ject to institutional voids accompanied by significant inequalities in

the form of formal economies dwarfed by their burgeoning informal

counterparts (e.g., Schneider, 2005). Consequently, socialized net-

works are of paramount importance both in terms of their largely sub-

suming all economic activity and in underpinning the entrepreneurial

ecosystem and early-stage finance. Moreover, although BAs are infor-

mal and unregulated, they are wholly focused on the demographically

narrower formal economic sector and opportunity-driven economic

activity, as opposed to subsistence (Amor

os et al., 2019). These issues

question the universality in the application of agency theory that is

prevalent in the prior BAs literature, given its assumptions of contrac-

tual completeness, minimal consideration of institutional embedded-

ness of economic relations, and emphasis on actors being both

rational and myopic. Further shortcomings with agency and institu-

tional theorization arise from a lack of consideration of ex ante

relationship-specific investment or asset specificity of BAs and their

investee recipients. This is particularly problematic in developing

economy contexts given the minimal theoretical accommodation of ex

ante network-specific non-contractible investments by actors, which

are essential for the underlying economic exchange. These shortcom-

ings motivate our novel application of Grossman and Hart's (1986)

incomplete contracting theory, which shares common theoretical

foundations to transaction cost economics (TCE) and provides a more

fine-grained analysis of BA involvement within investee firms.

Our theoretical framework adopts a twofold approach in first

drawing on a novel application of incomplete contracting theory

(Grossman & Hart, 1986; Hart & Moore, 1990) to rationalize optimal

BA ownership within investee firms followed by a second step in eval-

uating the implications of this level of ownership in terms of transac-

tion costs (see Foss & Weber, 2016). Incomplete contracting theory

emphasizes distortions in the ex ante relationship-specific invest-

ments or asset specificity (Hart, 2017) of BAs and their investee recip-

ients to their ex post equilibrium distributions in the level of

ownership-based control (e.g., Pandher, 2019). Such ownership levels

constitute the basis of incentivizing BAs and their investee recipients

to renege from hold up related opportunism. Our second step then

draws on the embeddedness of local stockbrokers within indigenous

society's social fabric in shaping their estimation of the degree of con-

gruity between the corporate governance structure of the investee

firm and the heuristics and related biases (Foss & Weber, 2016)of

external minority investors. These transaction costs are expressed as

stockbrokers' spread between their quoted bid and ask prices. Our

two-step theoretical approach to evaluating the transaction cost

implications for minority outside investors from BA ownership within

investee firms is our first theoretical contribution.

We further explore our theorization in terms of tensions aris-

ing from adopting two moderators of our main association

between BA ownership and transactions costs. The first is whether

the investee firm has a subsidiary or affiliated entity located in an

offshore financial center (OFC) within its corporate network

(e.g., Hearn et al., 2023). Paradoxically, such an OFC affiliate or

subsidiary can be used to enhance profitability, as well as expropri-

ate minority investors in equal measure. Such corporate networks

are prevalent in the Caribbean, which also hosts the largest con-

centration of the world's biggest OFCs. The extensive use of cor-

porate networks across the Caribbean is reflected in our opening

phrase from the St Lucian Kweyol language. Our second moderator

is the degree to which investee firms have adopted transparent

shareholder value corporate governance. This reflects investee

firms' degree of dis-embedding themselves from the opaque net-

work corporate governance model prevalent within the socio-

cultural fabric of indigenous communitarian societies across the

region. Our application of both moderators in teasing out tensions

within our Grossman and Hart (1986) incomplete contracting theo-

retic approach and specifically the transaction cost implication from

its ability to accommodate environmental contingencies is our

second theoretical contribution.

Our sample comprises 146 listed firms drawn from 8 national

securities markets from across the Caribbean region. These provide a

HEARN ET AL.787