Managing Performance Signals Through Delay: Evidence from Venture Capital
- Creators
- Chakraborty, Indraneel
- Ewens, Michael
Abstract
This paper examines whether agency conflicts during venture capital (VC) fundraising impact investment behavior. Using novel investment-level decisions of VCs in the process of raising new funds, we find that venture capitalists take actions hidden from their investors—i.e., limited partners (LPs)—that delay revealing negative information about VC fund performance until after a new fund is raised. After fundraising is complete, write-offs double and reinvestments in relatively worse-off entrepreneurial firms increase. We find that these observations cannot be explained by strategic bundling of news or effort constraints due to the newly raised fund. Funds with both long and short fundraising track record exhibit this behavior and the delay is costly for fund investors (LPs). This strategic delay shows that fundraising incentives have real impacts on VC fund investment decisions, which are often difficult for LPs to observe.
Additional Information
© 2018 INFORMS. Received: October 12, 2015. Revised: July 20, 2016. Accepted: September 7, 2016. Published Online in Articles in Advance: March 3, 2017. History: Accepted by Gustavo Manso, finance. For helpful comments and discussions, the authors thank Gustavo Manso (department editor); an anonymous associate editor; two anonymous referees; and Shai Bernstein, Sudheer Chava, Thomas Chemmanur, Marco Da Rin, Arthur Korteweg, Andrew MacKinlay, Debarshi Nandy, Manju Puri, Evan Rawley, Matthew Rhodes-Kropf, David Robinson, Ilya Strebulaev; and seminar participants at the 5th HEC Workshop on Entrepreneurship, Carnegie Mellon University, Stanford Graduate School of Business, and the 5th Entrepreneurial Finance and Innovation Conference. The authors are grateful to VentureSource and Correlation Ventures for access to data. M. Ewens recognizes the financial support of the Kauffman Junior Faculty Fellowship. M. Ewens is an advisor to, and investor in, Correlation Ventures.Attached Files
Supplemental Material - mnsc.2016.2662-sm.pdf
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Additional details
- Eprint ID
- 89028
- DOI
- 10.1287/mnsc.2016.2662
- Resolver ID
- CaltechAUTHORS:20180822-111107478
- Kauffman Junior Faculty Fellowship
- Created
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2018-08-22Created from EPrint's datestamp field
- Updated
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2021-11-16Created from EPrint's last_modified field