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Venture Cycles: Theory and Evidence

Author

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  • Thomas Gehrig
  • Rune Stenbacka

Abstract

We demonstrate how endogenous information acquisition in venture capital markets creates investment cycles when competing financiers undertake their screening decisions in an uncoordinated way, thereby highlighting the role of intertemporal screening externalities induced by competition among venture capitalists as a structural source of instability. We show that uncoordinated screening behavior of competing financiers is an independent source of fluctuations inducing venture investment cycles. We also empirically document the existence of cyclical features in a number of industries such as biotechnology, electronics, financial services, healthcare, medical services and consumer products.

Suggested Citation

  • Thomas Gehrig & Rune Stenbacka, 2003. "Venture Cycles: Theory and Evidence," CESifo Working Paper Series 882, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_882
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    File URL: http://www.cesifo-group.de/DocDL/cesifo_wp882.pdf
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    References listed on IDEAS

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    3. Thomas Gehrig & Rune Stenbacka, 2000. "Information Sharing in Banking: A Collusive Device?," Econometric Society World Congress 2000 Contributed Papers 1837, Econometric Society.
    4. Steven N. Kaplan & Per Strömberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 281-315.
    5. Lerner, Josh & Shane, Hilary & Tsai, Alexander, 2003. "Do equity financing cycles matter? evidence from biotechnology alliances," Journal of Financial Economics, Elsevier, vol. 67(3), pages 411-446, March.
    6. Samuel Kortum & Josh Lerner, 2000. "Assessing the Contribution of Venture Capital to Innovation," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 674-692, Winter.
    7. Steven N. Kaplan & Per Stromberg, 2001. "Venture Capitalists As Principals: Contracting, Screening, and Monitoring," NBER Working Papers 8202, National Bureau of Economic Research, Inc.
    8. Laura Bottazzi & Marco Da Rin, 2002. "Venture capital in Europe and the financing of innovative companies," Economic Policy, CEPR;CES;MSH, vol. 17(34), pages 229-270, April.
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    10. Hellmann, Thomas & Puri, Manju, 2000. "The Interaction between Product Market and Financing Strategy: The Role of Venture Capital," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 959-984.
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    13. Bolton, Patrick & Farrell, Joseph, 1990. "Decentralization, Duplication, and Delay," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 803-826, August.
    14. Jappelli, Tullio & Pagano, Marco, 2002. "Information sharing, lending and defaults: Cross-country evidence," Journal of Banking & Finance, Elsevier, vol. 26(10), pages 2017-2045, October.
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    Cited by:

    1. Gehrig, Thomas & Stenbacka, Rune, 2011. "Decentralized screening: Coordination failure, multiple equilibria and cycles," Journal of Financial Stability, Elsevier, vol. 7(2), pages 60-69, June.
    2. Dietz, Martin D., 2003. "Screening and advising by a venture capitalist with a time constraint," CFS Working Paper Series 2003/48, Center for Financial Studies (CFS).

    More about this item

    Keywords

    screening; venture capital; investment cycles;

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