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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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    More about this item

    Keywords

    Venture capital; Syndication; Homophily;
    All these keywords.

    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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