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
Date Written: March 5, 2016
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: Suggested Citation