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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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References

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  1. Yael V. Hochberg & Alexander Ljungqvist & Yang Lu, 2007. "Whom You Know Matters: Venture Capital Networks and Investment Performance," Journal of Finance, American Finance Association, vol. 62(1), pages 251-301, 02.
  2. Da Rin, M. & Nicodano, G. & Sembenelli, A., 2006. "Public policy and the creation of active venture capital markets," Open Access publications from Tilburg University urn:nbn:nl:ui:12-192935, Tilburg University.
  3. Cassiman , Bruno & Ueda, Masako, 2002. "Optimal project rejection and new firm start-ups," IESE Research Papers D/460, IESE Business School.
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  7. Bottazzi, Laura & Pesenti, Paolo & van Wincoop, Eric, 1996. "Wages, profits and the international portfolio puzzle," European Economic Review, Elsevier, vol. 40(2), pages 219-254, February.
  8. Josh Lerner & Antoinette Schoar, 2005. "Does Legal Enforcement Affect Financial Transactions? The Contractual Channel in Private Equity," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 223-246, January.
  9. Hellmann, Thomas F., 2002. "IPOs, Acquisitions and the Use of Convertible Securities in Venture Capital," Research Papers 1702r, Stanford University, Graduate School of Business.
  10. Simon Johnson & John McMillan, 2002. "Courts and Relational Contracts," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(1), pages 221-277, April.
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  12. Bottazzi, L. & Da Rin, M. & Hellmann, T., 2009. "What is the role of legal systems in financial intermediation? Theory and evidence," Open Access publications from Tilburg University urn:nbn:nl:ui:12-382980, Tilburg University.
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  16. Gennaioli, Nicola, 2011. "Optimal Contracts with Enforcement Risk," CEPR Discussion Papers 8405, C.E.P.R. Discussion Papers.
  17. 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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  23. 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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Blog mentions

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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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