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http://ssrn.com/abstract=997934
 
 

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The Importance of Trust for Investment: Evidence from Venture Capital


Laura Bottazzi


Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; University of Bologna - Department of Economics; Centre for Economic Policy Research (CEPR)

Marco Da Rin


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

Thomas F. Hellmann


Saïd Business School, University of Oxford ; University of British Columbia (UBC) - 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

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Date posted: July 3, 2007 ; Last revised: October 6, 2010

Suggested Citation

Bottazzi, Laura and Da Rin, Marco and Hellmann, Thomas F., The Importance of Trust for Investment: Evidence from Venture Capital (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. Available at SSRN: http://ssrn.com/abstract=997934

Contact Information

Laura Bottazzi
Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )
Via Roentgen 1
Milan, 20136
Italy
+39 02 5836 3326 (Phone)
+39 02 5836 3302 (Fax)
HOME PAGE: http://www.igier.uni-bocconi.it/bottazzi
University of Bologna - Department of Economics
Strada Maggiore 45
Bologna, 40125
Italy
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Marco Da Rin (Contact Author)
Department of Finance Tilburg University ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
Tilburg Law and Economics Center (TILEC)
Warandelaan 2
Tilburg, 5000 LE
Netherlands
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Thomas F. Hellmann
Saïd Business School, University of Oxford ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0)1865 288937 (Phone)
HOME PAGE: http://www.sbs.ox.ac.uk/community/people/thomas-hellmann
University of British Columbia (UBC) - Sauder School of Business ( email )
2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8476 (Phone)
604-822-8477 (Fax)
HOME PAGE: http://strategy.sauder.ubc.ca/hellmann
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