The Importance of Trust for Investment: Evidence from Venture Capital

Forthcoming, Review of Financial Studies

38 Pages Posted: 3 Jul 2007 Last revised: 6 Apr 2016

Laura Bottazzi

University of Bologna - Department of Economics; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Marco Da Rin

Tilburg University, Department of Finance; Tilburg Law and Economics Center (TILEC); European Corporate Governance Institute (ECGI)

Thomas F. Hellmann

University of Oxford - Said Business School; University of British Columbia (UBC) - Sauder School of Business; University of Oxford - Said Business School

Multiple version iconThere are 2 versions of this paper

Date Written: March 5, 2016

Abstract

We examine the effect of trust in venture capital. Our theory predicts a positive relationship of trust with investment, but a negative relationship with success. Using a hand-collected dataset of European venture capital deals, we find that the Eurobarometer measure of trust among nations positively predicts venture capital firms’ investment decisions, but that it has a negative correlation with successful exits. Our theory also predicts that earlier stage investments require higher trust, that syndication is more valuable in low trust situations, and that higher trust investors use more contingent contracts. The empirical evidence supports these predictions.

Keywords: Social Capital, Trust, Financial Contracts, Venture Capital, Corporate Governance

JEL Classification: G24, G34, K22, L14, M13, O16

Suggested Citation

Bottazzi, Laura and Da Rin, Marco and Hellmann, Thomas F., The Importance of Trust for Investment: Evidence from Venture Capital (March 5, 2016). Forthcoming, Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=997934

Laura Bottazzi

University of Bologna - Department of Economics

Strada Maggiore 45
Bologna, 40125
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 02 5836 3326 (Phone)
+39 02 5836 3302 (Fax)

HOME PAGE: http://www.igier.uni-bocconi.it/bottazzi

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Marco Da Rin (Contact Author)

Tilburg University, Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Thomas F. Hellmann

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0)1865 288937 (Phone)

HOME PAGE: http://www.sbs.ox.ac.uk/community/people/thomas-hellmann

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8476 (Phone)
604-822-8477 (Fax)

HOME PAGE: http://strategy.sauder.ubc.ca/hellmann

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0)1865 288937 (Phone)

HOME PAGE: http://www.sbs.ox.ac.uk/community/people/thomas-hellmann

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