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

60 Pages Posted: 22 Jan 2019 Last revised: 9 Sep 2019

See all articles by Sabrina Howell

Sabrina Howell

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

Date Written: May 15, 2019

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.

Keywords: venture capital, information asymmetry, entrepreneurship, competitions

JEL Classification: G24, G32

Suggested Citation

Howell, Sabrina, Reducing Information Frictions in Venture Capital: The Role of New Venture Competitions (May 15, 2019). Available at SSRN: https://ssrn.com/abstract=3318954 or http://dx.doi.org/10.2139/ssrn.3318954

Sabrina Howell (Contact Author)

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

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