The Effect of Syndication on Performance Manipulation in the Venture Capital Industry

60 Pages Posted: 21 Nov 2022

See all articles by Shrijata Chattopadhyay

Shrijata Chattopadhyay

SUNY at Binghamton - School of Management

Date Written: November 7, 2022

Abstract

Venture capital fund performance measures are manipulable. This paper examines the effect of syndication among venture capital (VC) funds on the funds' incentives to manipulate their performance measures. I show that the presence of new syndicate partners reduces misreporting by VC funds: (i) by reducing the opacity regarding funds' portfolio-company valuations and (ii) through common limited partners (LPs) who can observe discrepancies in portfolio-company valuations reported by syndicate partners. The effect is especially important during the follow-on fundraising period. To identify that syndicate partners reduce performance misreporting I use availability-of-syndicate-partners as an instrument for the number of new syndicate partners. The implications of my findings are that LPs should better monitor VC funds with fewer new syndicate partners and regulators should consider the presence of peer-monitoring among VC funds before imposing disclosure requirements.

Keywords: Venture capital, performance reporting, syndication, monitoring

JEL Classification: G23, G24

Suggested Citation

Chattopadhyay, Shrijata, The Effect of Syndication on Performance Manipulation in the Venture Capital Industry (November 7, 2022). Available at SSRN: https://ssrn.com/abstract=4270579 or http://dx.doi.org/10.2139/ssrn.4270579

Shrijata Chattopadhyay (Contact Author)

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States

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