Competition, Reputation, and Venture Capital Investment

48 Pages Posted: 13 Jan 2021 Last revised: 18 Oct 2021

See all articles by Nuri Ersahin

Nuri Ersahin

Michigan State University-Department of Finance

Ruidi Huang

Southern Methodist University (SMU) - Finance Department

Naveen Khanna

Michigan State University

Date Written: May 22, 2021

Abstract

This paper examines the impact of competition on the investment behavior and outcomes of venture capital (VC) firms with differing reputations. Following the introduction of investor tax credit programs that increase competition, reputable VCs decrease the number and size of their investments. The results are more pronounced in states with lower investment requirements and lower VC supply. Reputable VCs also reduce their syndicate size and shrink the time between financing rounds. They become less likely to partner with serial founders and their performance deteriorates. Our results suggest that increasing competition depresses returns for reputable VCs, hurting their incentive to invest.

Keywords: Venture capital, reputation, competition, investor tax credit

JEL Classification: G24, G28, G34

Suggested Citation

Ersahin, Nuri and Huang, Ruidi and Khanna, Naveen, Competition, Reputation, and Venture Capital Investment (May 22, 2021). SMU Cox School of Business Research Paper No. 21-02, Available at SSRN: https://ssrn.com/abstract=3761472 or http://dx.doi.org/10.2139/ssrn.3761472

Nuri Ersahin (Contact Author)

Michigan State University-Department of Finance ( email )

East Lansing, MI 48824
United States
8478686532 (Phone)

HOME PAGE: http://sites.google.com/site/nuriersahin/

Ruidi Huang

Southern Methodist University (SMU) - Finance Department ( email )

United States

Naveen Khanna

Michigan State University ( email )

East Lansing, MI 48824-1121
United States
517-353-1853 (Phone)
517-432-1080 (Fax)

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