Investment Ties Gone Awry

Academy of Management Journal (Forthcoming)

Posted: 13 Jun 2016 Last revised: 11 Apr 2019

See all articles by Kourosh Shafi

Kourosh Shafi

University of Florida - Center for Entrepreneurship and Innovation

Ali Mohammadi

Copenhagen Business School - Department of Strategy and Innovation; KTH Royal Institute of Technology

Sofia Johan

Florida Atlantic University - Finance; Tilburg Law and Economics Center (TILEC)

Date Written: February 6, 2019

Abstract

Forming early relationships increases entrepreneurial ventures’ chances of survival and success by allowing access to critical resources from partners. However, since not all ventures achieve their desired goals through collaboration due to uncertainty, such relationships are sometimes abandoned. This paper investigates the costs of ties that have gone awry in the context of venture capital investments. We conjecture that the adverse perceptions of signals associated with tie discontinuation reduce an investee venture’s valuation in the follow-on round of financing by partially deterring prospective investors, particularly higher-quality ones, from joining the syndicate. By examining large-sample evidence that supports our theory, we suggest that early entrepreneurial ties to venture capitalists may be a double-edged sword, especially in light of the costs of tie discontinuation.

Keywords: Inter-organizational relationships, reputation, signaling theory, tie discontinuation, venture capital

JEL Classification: G24

Suggested Citation

Shafi, Kourosh and Mohammadi, Ali and Johan, Sofia A., Investment Ties Gone Awry (February 6, 2019). Academy of Management Journal (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2792544 or http://dx.doi.org/10.2139/ssrn.2792544

Kourosh Shafi

University of Florida - Center for Entrepreneurship and Innovation ( email )

United States

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

Ali Mohammadi (Contact Author)

Copenhagen Business School - Department of Strategy and Innovation ( email )

Kilen
Frederiksberg, 2000
Denmark

KTH Royal Institute of Technology ( email )

Stockholm
Sweden

Sofia A. Johan

Florida Atlantic University - Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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