Optimal ownership of entrepreneurial firms with rational inattention

By introducing rational inattention into the setting in which an entrepreneurial firm has a growth option but has to issue equity to raise funds from a venture capitalist, we study the effects of the two parties' information flow constraint on the investment and ownership allocation. The results show that the larger the information-processing capacity, the later the option exercise and that the advantage of information processing increases the agent's ownership, generating a negative relationship between management ownership and option investment. The uncertainty in the profit flow enhances the advantage of information processing by allowing the agent with larger capacity to hold a greater ownership, whereas the effects of the long-term mean of profit flow depends on whether it is high or low and the reversion speed of profit flow almost has no contribution to the effects of advantage of information processing on the ownership allocation. (C) 2021 Elsevier B.V. All rights reserved.