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The Importance of Trust for Investment: Evidence From Venture Capital (Revision of DP 2009-43)

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Author Info

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

    (Tilburg University, Center for Economic Research)

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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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-49.

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Date of creation: 2010
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Handle: RePEc:dgr:kubcen:201049

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Web page: http://center.uvt.nl

Related research

Keywords: Venture Capital; Social Capital; Trust; Financial Contracts; Corporate Governance.;

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  1. Henry Chen & Paul Gompers & Anna Kovner & Josh Lerner, 2009. "Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion," NBER Working Papers 15102, National Bureau of Economic Research, Inc.
  2. Laura Bottazzi & Marco Da Rin, . "Euro.NM and the Financing of European Innovative Firms," Working Papers 171, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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  8. Da Rin, Marco & Nicodano, Giovanna & Sembenelli, Alessandro, 2005. "Public policy and the creation of active venture capital markets," Working Paper Series 0430, European Central Bank.
  9. L. Bottazzi & M. Da Rin & T. Hellmann, 2007. "Who are the active investors? Evidence from Venture Capital," Working Papers 611, Dipartimento Scienze Economiche, Universita' di Bologna.
  10. Sofronis Clerides & Thanasis Stengos, 2012. "Love thy Neighbour, Love Thy Kin: Strategy and Bias in the Eurovision Song Contest," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 15(1), pages 22-44, Summer.
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  1. Stretching Your Global Mindset
    by Pankaj Ghemawat in HBR Blog Network on 2011-07-28 16:55:40
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Cited by:
  1. Tykvová, Tereza & Schertler, Andrea, 2011. "Cross-border venture capital flows and local ties: Evidence from developed countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(1), pages 36-48, February.

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