The Importance of Trust for Investment: Evidence from Venture Capital (Replaced by DP 2010-49)
AbstractWe 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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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2009-43.
Date of creation: 2009
Date of revision:
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Web page: http://center.uvt.nl
Venture Capital; Social Capital; Trust; Financial Contracts; Corporate Governance.;
Find related papers by JEL classification:
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
- M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups
This paper has been announced in the following NEP Reports:
- NEP-ACC-2009-06-10 (Accounting & Auditing)
- NEP-ALL-2009-06-10 (All new papers)
- NEP-BEC-2009-06-10 (Business Economics)
- NEP-CFN-2009-06-10 (Corporate Finance)
- NEP-EEC-2009-06-10 (European Economics)
- NEP-ENT-2009-06-10 (Entrepreneurship)
- NEP-SOC-2009-06-10 (Social Norms & Social Capital)
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