The Importance of Trust for Investment: Evidence From Venture Capital (Revision of DP 2009-43)

L. Bottazzi, M. Da Rin, T. Hellmann

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Abstract

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.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages55
Volume2010-49
Publication statusPublished - 2010

Publication series

NameCentER Discussion Paper
Volume2010-49

Keywords

  • Venture Capital
  • Social Capital
  • Trust
  • Financial Contracts
  • Corporate Governance.

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