Peer Monitoring, Syndication, and the Dynamics of Venture Capital Interactions: Theory and Evidence

Forthcoming, Journal of Financial and Quantitative Analysis

76 Pages Posted: 10 Apr 2019 Last revised: 26 Jun 2019

See all articles by Onur Bayar

Onur Bayar

University of Texas at San Antonio, College of Business

Thomas J. Chemmanur

Boston College - Carroll School of Management

Xuan Tian

Tsinghua University - PBC School of Finance

Date Written: December 2018

Abstract

We develop a new rationale for the formation of VC syndicates, and theoretically analyze the dynamics of VC syndicates. In our model, an entrepreneur needs financing from VC investors to implement his firm’s positive NPV project. In addition to financing, VCs can provide the firm with two inputs (each in a different area of activity), which can increase the probability of project success: these inputs can be provided either by a single VC, or by two different VCs, each operating in his own area of expertise. We analyze the firm’s equilibrium choice between financing the project by contracting with a single VC, by contracting individually with two VCs, or by contracting with a syndicate consisting of two VCs. Our analysis generates several testable predictions for the equilibrium choice of the structure of VC financing, for the evolution of this structure across financing rounds, as well as for the dynamics of the composition of VC syndicates and for how this dynamics affects entrepreneurial firms’ probability of successful exit. We also present empirical evidence that is consistent with the predictions of our model.

Keywords: Peer Monitoring, Venture Capital, Syndication

JEL Classification: G24

Suggested Citation

Bayar, Onur and Chemmanur, Thomas J. and Tian, Xuan, Peer Monitoring, Syndication, and the Dynamics of Venture Capital Interactions: Theory and Evidence (December 2018). Forthcoming, Journal of Financial and Quantitative Analysis. Available at SSRN: https://ssrn.com/abstract=1343116 or http://dx.doi.org/10.2139/ssrn.1343116

Onur Bayar

University of Texas at San Antonio, College of Business ( email )

The University of Texas at San Antonio
One UTSA Circle
San Antonio, TX 78249
United States
210-458-6837 (Phone)
210-458-6320 (Fax)

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Xuan Tian (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

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