The Importance of Trust for Investment: Evidence from Venture Capital
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
Saïd Business School, University of Oxford ; University of British Columbia (UBC) - Sauder School of Business; University of Oxford - Said Business School
March 5, 2016
Forthcoming, Review of Financial Studies
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.
Number of Pages in PDF File: 38
Keywords: Social Capital, Trust, Financial Contracts, Venture Capital, Corporate Governance
JEL Classification: G24, G34, K22, L14, M13, O16
Date posted: July 3, 2007 ; Last revised: April 6, 2016
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
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