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The Importance of Trust for Investment: Evidence from Venture Capital

Listed author(s):
  • Laura Bottazzi
  • Marco Da Rin
  • Thomas F. Hellmann

We examine the effect of trust on financial investment and contracting decisions in a micro-economic environment where trust is exogenous. Using hand-collected data on European venture capital, we show that the Eurobarometer measure of trust among nations significantly affects investment decisions. This holds even after controlling for investor and company fixed effects, geographic distance, information and transaction costs. The national identity of venture capital firms' individual partners further contributes to the effect of trust. Education and work experience reduce the effect of trust but do not eliminate it. We also examine the relationship between trust and sophisticated contracts involving contingent control rights and find that, even after controlling for endogeneity, they are complements, not substitutes.

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File URL: http://www.nber.org/papers/w16923.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16923.

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Date of creation: Apr 2011
Publication status: published as Laura Bottazzi & Marco Da Rin & Thomas Hellmann, 2016. "The Importance of Trust for Investment: Evidence from Venture Capital," Review of Financial Studies, vol 29(9), pages 2283-2318.
Handle: RePEc:nbr:nberwo:16923
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