Financing With Investor Syndicates

Projects and firms are often financed by investor syndicates. I study how investors acquire and share information in syndicates and solve the entrepreneur’s financial contracting problem. The key mechanism is that investors share information through strategic communication. Contracts determine whether investors have conflicts of interest and thus how they communicate strategically. When the project is not promising before the screening, the optimal contract intends to align investors’ interests and thus facilitate information sharing in the syndicate. When the project is promising before the screening, the optimal contract intends to differentiate investors, create conflicts of interest, and eventually impede information sharing. These results are consistent with the stylized facts about syndicate structures observed in reality. Welfare analysis implies that restricting investor differentiation in syndicates is not socially preferred. I develop a new theory for the formation and the structures of investor syndicates.