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The Importance of Trust for Investment: Evidence from Venture Capital

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  • L. Bottazzi
  • M. Da Rin
  • T. Hellmann

Abstract

We examine the effect of trust on financial investment and contracting decisions in a micro-economic environment where trust is exogenous. Using hand-collected data on European venture capital, we show that the Eurobarometer measure of trust among nations significantly affects investment decisions. This holds even after controlling for investor and company fixed effects, geographic distance, information and transaction costs. The national identity of venture capital firms' individual partners further contributes to the effect of trust. Education and work experience reduce the effect of trust but do not eliminate it. We also examine the relationship between trust and sophisticated contracts involving contingent control rights and find that, even after controlling for endogeneity, they are complements, not substitutes.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 612.

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Date of creation: Oct 2007
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Handle: RePEc:bol:bodewp:612

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Citations

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Cited by:
  1. Da Rin, M. & Hellmann, T. & Puri, M.L., 2011. "A Survey of Venture Capital Research," Discussion Paper, Tilburg University, Center for Economic Research 2011-111, Tilburg University, Center for Economic Research.
  2. Giannetti, Mariassunta & Yafeh, Yishay, 2008. "Do Cultural Differences Between Contracting Parties Matter? Evidence from Syndicated Bank Loans," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7020, C.E.P.R. Discussion Papers.
  3. Wolf, Holger, 2011. "Relationship-based and arms-length financial systems -- a European perspective," Policy Research Working Paper Series 5833, The World Bank.
  4. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2009. "Cultural Biases in Economic Exchange?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 124(3), pages 1095-1131, August.
  5. Moshe Kim & Jordi Surroca & Josep A. Tribó, 2009. "The effect of social capital on financial capital," Business Economics Working Papers id-09-02, Universidad Carlos III, Instituto sobre Desarrollo Empresarial "Carmen Vidal Ballester".
  6. Giorgio Albareto & Paolo Mistrulli, 2011. "Bridging the gap between migrants and the banking system," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 794, Bank of Italy, Economic Research and International Relations Area.
  7. Bottazzi, Laura & Da Rin, Marco & Hellmann, Thomas, 2009. "What is the role of legal systems in financial intermediation? Theory and evidence," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 18(4), pages 559-598, October.
  8. Miria Pigato, 2009. "Strengthening China's and India's Trade and Investment Ties to the Middle East and North Africa," World Bank Publications, The World Bank, number 2626, August.
  9. Aleksandar Bradic, 2012. "The Role of Social Feedback in Financing of Technology Ventures," Papers 1301.2196, arXiv.org.

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