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The Importance of Trust for Investment: Evidence from Venture Capital

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  • Laura Bottazzi
  • Marco Da Rin
  • Thomas 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 IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 325.

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Date of creation: 2007
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Handle: RePEc:igi:igierp:325

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Cited by:
  1. 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.
  2. Aleksandar Bradic, 2012. "The Role of Social Feedback in Financing of Technology Ventures," Papers 1301.2196, arXiv.org.
  3. 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, October.
  4. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2005. "Cultural Biases in Economic Exchange," CEPR Discussion Papers 4837, C.E.P.R. Discussion Papers.
  5. Giannetti, Mariassunta & Yafeh, Yishay, 2008. "Do Cultural Differences Between Contracting Parties Matter? Evidence from Syndicated Bank Loans," CEPR Discussion Papers 7020, C.E.P.R. Discussion Papers.
  6. Albareto, G. & Mistrulli, P.E., 2010. "Bridging the gap between migrants and the banking system," MPRA Paper 26476, University Library of Munich, Germany.
  7. Da Rin, M. & Hellmann, T. & Puri, M.L., 2011. "A Survey of Venture Capital Research," Discussion Paper 2011-044, Tilburg University, Tilburg Law and Economic Center.
  8. 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".
  9. Wolf, Holger, 2011. "Relationship-based and arms-length financial systems -- a European perspective," Policy Research Working Paper Series 5833, The World Bank.

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