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The impact of trust on private equity contracts

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Author Info
Sophie Manigart ()
M. Audrey Korsgaard
Robert Folger
Harry J. Sapienza
Katleen Baeyens (Vlerick Leuven Gent Management School)

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Abstract

This paper adresses the impact of trust on private equity contracts. Trust between investor and entrepreneur is essential to help overcome control problems, especially in an environment with severe agency risks and incomplete contracts. In this study, information about the effects of trust is collected using a simulation with 144 entrepreneurs and investors. We find that trust has an impact on the desired contracts of entrepreneurs, but not on that of investors. Our findings suggest that for parties, faced with potentially large agency problems (investors), trust and control seem to play complementary roles. On the other hand, for parties faced with smaller agency problems (entrepreneurs), trust seems to be a substitute for control.

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Paper provided by Vlerick Leuven Gent Management School in its series Vlerick Leuven Gent Management School Working Paper Series with number 2002-1.

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Length: 21 pages
Date of creation: 01 Feb 2002
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Handle: RePEc:vlg:vlgwps:2002-1

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  1. Gifford, Sharon, 1997. "Limited attention and the role of the venture capitalist," Journal of Business Venturing, Elsevier, vol. 12(6), pages 459-482, November. [Downloadable!] (restricted)
  2. Chan, Yuk-Shee & Siegel, Daniel R & Thakor, Anjan V, 1990. "Learning, Corporate Control and Performance Requirements in Venture Capital Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 365-81, May. [Downloadable!] (restricted)
  3. Kaplan, Steven & Strömberg, Per Johan, 2000. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," CEPR Discussion Papers 2421, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October. [Downloadable!] (restricted)
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Cited by:
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  1. Cumming, Douglas & Johan, Sofia, 2006. "Corporate social responsibility: domestic and international private equity institutional investment," Discussion Paper 2, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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