The Importance of Trust for Investment: Evidence from Venture Capital

Bottazzi, Laura; Da Rin, Marco; Hellmann, Thomas F.

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The Importance of Trust for Investment: Evidence from Venture Capital

Forthcoming, Review of Financial Studies

38 Pages Posted: 3 Jul 2007 Last revised: 6 Apr 2016

See all articles by Laura Bottazzi

Laura Bottazzi

University of Bologna - Department of Economics; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Marco Da Rin

Tilburg University, Department of Finance; Tilburg Law and Economics Center (TILEC); European Corporate Governance Institute (ECGI)

Thomas F. Hellmann

University of Oxford - Said Business School; University of Oxford - Said Business School; European Corporate Governance Initiative

There are 2 versions of this paper

Date Written: March 5, 2016

Abstract

We examine the effect of trust in venture capital. Our theory predicts a positive relationship of trust with investment, but a negative relationship with success. Using a hand-collected dataset of European venture capital deals, we find that the Eurobarometer measure of trust among nations positively predicts venture capital firms’ investment decisions, but that it has a negative correlation with successful exits. Our theory also predicts that earlier stage investments require higher trust, that syndication is more valuable in low trust situations, and that higher trust investors use more contingent contracts. The empirical evidence supports these predictions.

Keywords: Social Capital, Trust, Financial Contracts, Venture Capital, Corporate Governance

JEL Classification: G24, G34, K22, L14, M13, O16

Suggested Citation: Suggested Citation

Bottazzi, Laura and Da Rin, Marco and Hellmann, Thomas F., The Importance of Trust for Investment: Evidence from Venture Capital (March 5, 2016). Forthcoming, Review of Financial Studies, Available at SSRN: https://ssrn.com/abstract=997934