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Investment stage drifts and venture capital managerial incentives

Author

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  • Buzzacchi, Luigi
  • Scellato, Giuseppe
  • Ughetto, Elisa

Abstract

This paper investigates VC investment stage drifts as explained by the outcomes of managerial incentive schemes under different financial market conditions and past return performances. We exploit a unique dataset containing data for all of the venture capital funds in Europe that received financial support from the European Investment Fund (EIF) during the years 1998–2007. The dataset includes 149 VC funds that invested in 1925 companies. We find that a higher hurdle rate produces a compensation incentive that discourages VC managers from lowering funds' risk. We also observe that more reputable fund managers are less likely to increase risk by downward stage drifting and more likely to play it safe by following upward stage drifting strategies. Finally, managers of funds with a poor past performance appear to be less keen to perform stage drifts towards less risky stages, relative to well-performing fund managers. The latter evidence is more significant in periods of bull financial markets.

Suggested Citation

  • Buzzacchi, Luigi & Scellato, Giuseppe & Ughetto, Elisa, 2015. "Investment stage drifts and venture capital managerial incentives," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 118-128.
  • Handle: RePEc:eee:corfin:v:33:y:2015:i:c:p:118-128
    DOI: 10.1016/j.jcorpfin.2015.05.006
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    Cited by:

    1. repec:eee:corfin:v:47:y:2017:i:c:p:110-130 is not listed on IDEAS
    2. repec:spr:jbecon:v:88:y:2018:i:3:d:10.1007_s11573-017-0874-4 is not listed on IDEAS

    More about this item

    Keywords

    Venture capital funds; Investment style drift; Managerial incentives;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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