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The cost of friendship

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  • Gompers, Paul A.
  • Mukharlyamov, Vladimir
  • Xuan, Yuhai

Abstract

We investigate how personal characteristics affect people's desire to collaborate and whether this attraction enhances or detracts from performance in venture capital. We find that venture capitalists who share the same ethnic, educational, or career background are more likely to syndicate with each other. This homophily reduces the probability of investment success, and the detrimental effect is most prominent for early-stage investments. A variety of tests show that the cost of affinity is most likely attributable to poor decision-making by high-affinity syndicates after the investment is made. These results suggest that “birds-of-a-feather-flock-together” effects in collaboration can be costly.

Suggested Citation

  • Gompers, Paul A. & Mukharlyamov, Vladimir & Xuan, Yuhai, 2016. "The cost of friendship," Journal of Financial Economics, Elsevier, vol. 119(3), pages 626-644.
  • Handle: RePEc:eee:jfinec:v:119:y:2016:i:3:p:626-644
    DOI: 10.1016/j.jfineco.2016.01.013
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fuchs, Florian & Fuess, Roland & Jenkinson, Tim & Morkoetter, Stefan, 2017. "Winning a Deal in Private Equity: Do Educational Networks Matter?," Working Papers on Finance 17155, University of St. Gallen, School of Finance.
    2. repec:eee:pacfin:v:49:y:2018:i:c:p:30-42 is not listed on IDEAS
    3. Paul Gompers & William Gornall & Steven N. Kaplan & Ilya A. Strebulaev, 2016. "How Do Venture Capitalists Make Decisions?," NBER Working Papers 22587, National Bureau of Economic Research, Inc.
    4. repec:bla:ecopol:v:29:y:2017:i:2:p:91-117 is not listed on IDEAS
    5. Paul A. Gompers & Kevin Huang & Sophie Q. Wang, 2017. "Homophily in Entrepreneurial Team Formation," NBER Working Papers 23459, National Bureau of Economic Research, Inc.
    6. Paul A. Gompers & Sophie Q. Wang, 2017. "And the Children Shall Lead: Gender Diversity and Performance in Venture Capital," NBER Working Papers 23454, National Bureau of Economic Research, Inc.
    7. repec:kap:sbusec:v:51:y:2018:i:3:d:10.1007_s11187-018-0076-7 is not listed on IDEAS
    8. repec:eee:jbfina:v:100:y:2019:i:c:p:306-327 is not listed on IDEAS
    9. repec:eee:respol:v:47:y:2018:i:1:p:49-60 is not listed on IDEAS
    10. Ross Levine & Chen Lin & Zigan Wang, 2017. "Acquiring Banking Networks," NBER Working Papers 23469, National Bureau of Economic Research, Inc.
    11. repec:kap:sbusec:v:50:y:2018:i:2:d:10.1007_s11187-016-9832-8 is not listed on IDEAS
    12. Du, Qianqian, 2016. "Birds of a feather or celebrating differences? The formation and impacts of venture capital syndication," Journal of Empirical Finance, Elsevier, vol. 39(PA), pages 1-14.
    13. repec:eee:respol:v:47:y:2018:i:3:p:637-649 is not listed on IDEAS
    14. Jedrzej Bialkowski & Laura T. Starks, 2016. "SRI Funds: Investor Demand, Exogenous Shocks and ESG Profiles," Working Papers in Economics 16/11, University of Canterbury, Department of Economics and Finance.
    15. repec:eee:corfin:v:48:y:2018:i:c:p:474-491 is not listed on IDEAS
    16. Rizzo, Emanuele, 2018. "Essays on corporate governance and the impact of regulation on financial markets," Other publications TiSEM b5158260-ea13-4763-b992-6, Tilburg University, School of Economics and Management.
    17. repec:eee:enepol:v:121:y:2018:i:c:p:476-487 is not listed on IDEAS
    18. Paul A. Gompers & Sophie Q. Wang, 2017. "And the Children Shall Lead: Gender Diversity and Performance in Venture Capital," Harvard Business School Working Papers 17-103, Harvard Business School.
    19. repec:eee:jbfina:v:100:y:2019:i:c:p:359-378 is not listed on IDEAS

    More about this item

    Keywords

    Venture capital; Syndication; Homophily;

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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