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Venture Capital Funds: Performance Persistence and Flow-Performance Relation

42 Pages Posted: 6 Mar 2008 Last revised: 18 Sep 2009

Ludovic Phalippou

University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance

Abstract

This paper finds that venture capital funds that are expected to be backed by more skilled investors show no performance persistence but a significant flow-performance relationship. In contrast, funds that are expected to be backed by less skilled investors show performance predictability and have a non-significant flow-performance relationship. These results suggest that only skilled investors use all available information to adjust their capital allocation and, as a result, eliminate performance predictability as argued theoretically by Berk and Green (2004). Results also show that Kaplan and Schoar (2005) overstate the persistence in fund performance by not using an ex ante measure of the performance of earlier funds. Whether or not an ex ante measure is used, however, the persistence is largely due to unsophisticated investors. When investors are sophisticated, the performance of earlier funds, sequence and fund size do not help predict the performance of the focal fund.

Keywords: Venture Capital Funds, Performance Persistence, Flow-Performance

JEL Classification: G24

Suggested Citation

Phalippou, Ludovic, Venture Capital Funds: Performance Persistence and Flow-Performance Relation. EFA 2008 Athens Meetings Paper; Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1101408 or http://dx.doi.org/10.2139/ssrn.1101408

Ludovic Phalippou (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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