Does Reputation Limit Opportunistic Behavior in the VC Industry? Evidence from Litigation against VCs

66 Pages Posted: 19 Feb 2009 Last revised: 2 Aug 2014

Multiple version iconThere are 2 versions of this paper

Date Written: December 28, 2012

Abstract

We provide the first systematic analysis of the role of reputation in limiting opportunistic behavior by venture capitalists towards four types of counterparties: entrepreneurs, investors, other VCs, and buyers of VC-backed startups. Using a hand-collected database of lawsuits, we document that more reputable VCs (i.e., VCs that are older, have more deals, more funds under management, and syndicate with larger networks of venture capitalists) are less likely to be litigated. We also find that litigated VCs suffer declines in future business relative to carefully selected peers. These negative effects are stronger for more reputable VCs, and when VCs are defendants to multiple lawsuits or sued by entrepreneurs. Our results suggest that reputational mechanisms help deter VC opportunism.

Keywords: venture capital, litigation, reputation markets

JEL Classification: G24, G33

Suggested Citation

Atanasov, Vladimir A. and Ivanov, Vladimir and Litvak, Kate, Does Reputation Limit Opportunistic Behavior in the VC Industry? Evidence from Litigation against VCs (December 28, 2012). Journal of Finance, 67, 2215-2246 ; EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1343981 or http://dx.doi.org/10.2139/ssrn.1343981

Vladimir A. Atanasov

William and Mary - Raymond A. Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States

Vladimir Ivanov (Contact Author)

US Securities & Exchange Commission ( email )

Washington, DC
United States
202-551-5307 (Phone)

Kate Litvak

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

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