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http://ssrn.com/abstract=1260496
 
 

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Informational Hold-Up and Performance Persistence in Venture Capital


Yael V. Hochberg


National Bureau of Economic Research (NBER); Rice University - Jesse H. Jones Graduate School of Business

Alexander Ljungqvist


New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Annette Vissing-Jorgensen


Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

October 16, 2012

EFA 2009 Bergen Meetings Paper

Abstract:     
Why don't successful venture capitalists eliminate excess demand for their follow-on funds by aggressively raising their performance fees? We propose a theory of learning that leads to informational hold-up in the VC market. Investors in a fund learn whether the VC has skill or was lucky, whereas potential outside investors only observe returns. This gives the VC's current investors hold-up power when the VC raises his next fund: Without their backing, he cannot persuade anyone else to fund him, since outside investors would interpret the lack of backing as a sign that his skill is low. This hold-up power diminishes the VC's ability to increase fees in line with performance. The model provides a rationale for the persistence in after-fee returns documented by Kaplan and Schoar (2005). Empirical evidence from a large sample of U.S. VC funds is consistent with the model. We estimate that up to 68.7% of VC firms lack skill.

Number of Pages in PDF File: 83

Keywords: Venture Capital, Performance Persistence, Learning, Hold-up

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Date posted: September 1, 2008 ; Last revised: October 29, 2014

Suggested Citation

Hochberg, Yael V. and Ljungqvist, Alexander and Vissing-Jorgensen, Annette, Informational Hold-Up and Performance Persistence in Venture Capital (October 16, 2012). EFA 2009 Bergen Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1260496 or http://dx.doi.org/10.2139/ssrn.1260496

Contact Information

Yael V. Hochberg (Contact Author)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Rice University - Jesse H. Jones Graduate School of Business ( email )
6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
Alexander Ljungqvist
New York University (NYU) - Department of Finance ( email )
Stern School of Business
44 West 4th Street, Suite 9-160
New York, NY 10012-1126
United States
212-998-0304 (Phone)
212-995-4220 (Fax)
HOME PAGE: http://pages.stern.nyu.edu/~aljungqv
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Research Institute of Industrial Economics (IFN) ( email )
Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden
Annette Vissing-Jorgensen
Northwestern University - Kellogg School of Management ( email )
Department of Finance
2001 Sheridan Road
Evanston, IL 60208-2001
United States
HOME PAGE: http://www.kellogg.northwestern.edu/faculty/vissing/htm/research1.htm
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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