Reducing Information Frictions in Venture Capital: The Role of New Venture Competitions

54 Pages Posted: 2 Oct 2017 Last revised: 4 Jun 2018

See all articles by Sabrina Howell

Sabrina Howell

New York University (NYU) - Leonard N. Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 2017

Abstract

Venture capital, an important source of financing for potentially high-growth new businesses, is believed to suffer from information frictions. This paper quantifies the magnitude of these frictions among participants in new venture competitions. In a regression discontinuity design with data from 87 competitions, winning a round increases the chances of external financing by about 35 percent. Winning is most impactful for ventures ranked just above the cutoff but that receive no cash prize, and judge ranks strongly predict venture success. The results indicate that information problems in new venture finance are large, and competitions can help resolve them through certification.

Suggested Citation

Howell, Sabrina, Reducing Information Frictions in Venture Capital: The Role of New Venture Competitions (September 2017). NBER Working Paper No. w23874. Available at SSRN: https://ssrn.com/abstract=3046387

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New York University (NYU) - Leonard N. Stern School of Business ( email )

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