Which Limited Partners Limit VC Opportunism?

26 Pages Posted: 8 Apr 2014 Last revised: 1 Jun 2014

See all articles by Vladimir A. Atanasov

Vladimir A. Atanasov

William and Mary - Raymond A. Mason School of Business

Thomas W. Hall

Christopher Newport University

Vladimir I. Ivanov

US Securities & Exchange Commission

Kate Litvak

Northwestern University - Pritzker School of Law

Date Written: April 7, 2014

Abstract

We examine the response of different types of Limited Partners (LPs) to alleged opportunistic behavior on the part of Venture Capitalists (VCs). We use a sample of litigated VCs (identified by Atanasov, et al, 2012, Journal of Finance) to proxy for VC opportunistic behavior. Based on their presumed sensitivity to VC malfeasance and headline risk, we predict that university endowments and economic development authorities will be most likely to respond negatively to potential bad press. To test our hypothesis, we employ differences-in-differences (DiD) analysis and compare the participation of different types of LPs in VC funds before and after litigation relative to the LPs of otherwise similar, matched VCs that are not subject to litigation. We find that endowments reduce by more than 50% their participation in follow-on investment funds offered by litigated VCs relative to other types of LPs. Our results suggest that the threat of university endowment withdrawal of funding can deter VC opportunism.

Keywords: venture capital, litigation, limited partners, differences-in-differences

JEL Classification: G24, G33

Suggested Citation

Atanasov, Vladimir A. and Hall, Thomas William and Ivanov, Vladimir and Litvak, Kate, Which Limited Partners Limit VC Opportunism? (April 7, 2014). Northwestern Law & Econ Research Paper No. 14-10, Northwestern Public Law Research Paper No. 14-21, Available at SSRN: https://ssrn.com/abstract=2421827 or http://dx.doi.org/10.2139/ssrn.2421827

Vladimir A. Atanasov

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

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

Thomas William Hall (Contact Author)

Christopher Newport University ( email )

United States

Vladimir Ivanov

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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