The Effect of Inter-firm Ties on Performance in Financial Markets

30 Pages Posted: 19 Jan 2016 Last revised: 26 Feb 2016

See all articles by Umit Ozmel

Umit Ozmel

Purdue University - Krannert School of Management

M. Deniz Yavuz

Purdue University - Krannert School of Management

Ranjay Gulati

Harvard Business School - Organizational Behavior

Timothy E. Trombley

Illinois State University

Date Written: February 11, 2016

Abstract

The present study examines the effect of the information obtained through close inter-firm ties on the investor’s risk-adjusted returns. We suggest that there is a closely connected tie between an investor and an entrepreneurial firm if the investor is a limited partner of the entrepreneurial firm’s lead venture capital (VC) fund. We hypothesize that such closely connected ties convey credible, timely, and precise information regarding the underlying value of the entrepreneurial firm, which is especially valuable when market conditions are unfavorable and when the investor faces higher information asymmetry. Supporting our hypotheses, we show that investors with closely connected ties to entrepreneurial firms receive higher returns on their investments, and their returns are particularly high when investor sentiment is low (unfavorable market conditions) and when there is higher information asymmetry due to greater geographical distance.

Keywords: interorganizational ties, information asymmetry, investor sentiment, investment returns, venture capital

JEL Classification: L14, L26, G11, G24

Suggested Citation

Ozmel, Umit and Yavuz, M. Deniz and Gulati, Ranjay and Trombley, Timothy E., The Effect of Inter-firm Ties on Performance in Financial Markets (February 11, 2016). Available at SSRN: https://ssrn.com/abstract=2717691 or http://dx.doi.org/10.2139/ssrn.2717691

Umit Ozmel (Contact Author)

Purdue University - Krannert School of Management ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

M. Deniz Yavuz

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Ranjay Gulati

Harvard Business School - Organizational Behavior ( email )

Soldiers Field Road
Morgan 317
Boston, MA 02163
United States
617-495-8554 (Phone)
617-496-6568 (Fax)

HOME PAGE: http://www.hbs.edu

Timothy E. Trombley

Illinois State University ( email )

Normal, IL 61790
United States

HOME PAGE: http://www.timtrombley.com

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