The Cost of Friendship
AbstractThis paper explores two broad questions on collaboration between individuals. First, we investigate what personal characteristics affect people’s desire to work together. Second, given the influence of these personal characteristics, we analyze whether this attraction enhances or detracts from performance. Addressing these problems in the venture capital syndication setting, we show that venture capitalists exhibit strong detrimental homophily in their co-investment decisions. We find that individual venture capitalists choose to collaborate with other venture capitalists for both ability-based characteristics (e.g., whether both individuals in a dyad obtained a degree from a top university) and affinity-based characteristics (e.g., whether individuals in a pair share the same ethnic background, attended the same school, or worked for the same employer previously). Moreover, frequent collaborators in syndication are those venture capitalists who display a high level of mutual affinity. We find that while collaborating for ability-based characteristics enhances investment performance, collaborating for affinity-based characteristics dramatically reduces the probability of investment success. A variety of tests show that the cost of affinity is not driven by selection into inferior deals; the effect is most likely attributable to poor decision-making by high-affinity syndicates post investment. Taken together, our results suggest that non-ability-based “birds-of-a-feather-flock-together” effects in collaboration can be costly.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18141.
Date of creation: Jun 2012
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Find related papers by JEL classification:
- G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- G3 - Financial Economics - - Corporate Finance and Governance
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-25 (All new papers)
- NEP-ENT-2012-06-25 (Entrepreneurship)
- NEP-SOC-2012-06-25 (Social Norms & Social Capital)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:CitEc Project, subscribe to its RSS feed for this item.
- Bengtsson, Ola & Hsu, David H., 2013. "Ethnic Matching in the U.S. Venture Capital Market," Knut Wicksell Working Paper Series 2013/8, Knut Wicksell Centre for Financial Studies, Lund University.
- Franz Hackl & Michael Hummer & Gerald Pruckner, 2013.
"Old Boys’ Network in General Practitioner’s Referral Behavior,"
NRN working papers
2013-08, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.
- Franz Hackl & Michael Hummer & Gerald Pruckner, 2013. "Old Boys’ Network in General Practitioner’s Referral Behavior," Economics working papers 2013-10, Department of Economics, Johannes Kepler University Linz, Austria.
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