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The Importance of Trust for Investment: Evidence from Venture CapitalLaura BottazziBocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; University of Bologna - Department of Economics; Centre for Economic Policy Research (CEPR) Marco Da RinBocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; Tilburg University - Department of Finance; Tilburg Law and Economics Center (TILEC); European Corporate Governance Institute (ECGI) Thomas F. HellmannUniversity of British Columbia - Sauder School of Business May 10, 2010 ECGI - Finance Working Paper No. 187/2007 EFA 2007 Ljubljana Meetings Paper CentER Discussion Paper Series No. 2010-49 (Revision of No. 2009-43) TILEC Discussion Paper No. 2010-023 Abstract: We examine the effect of trust on financial investment and contracting decisions in a micro-economic environment where trust is exogenous. Using hand-collected data on European venture capital, we show that the Eurobarometer measure of trust among nations significantly affects investment decisions. This holds even after controlling for investor and company fixed effects, geographic distance, information and transaction costs. The national identity of venture capital firms’ individual partners further contributes to the effect of trust. Education and work experience reduce the effect of trust but do not eliminate it. We also examine the relationship between trust and sophisticated contracts involving contingent control rights and find that, even after controlling for endogeneity, they are complements, not substitutes.
Number of Pages in PDF File: 46 Keywords: Social Capital, Trust, Financial Contracts, Venture Capital, Corporate Governance JEL Classification: G24, G34, K22, L14, M13, O16 Accepted Paper SeriesDate posted: July 3, 2007 ; Last revised: October 6, 2010Suggested CitationContact Information
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