Does Distance Still Matter? Evidence from the Venture Capital Market
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چکیده
We use the venture capital market to examine two phenomena: “grandstanding” by relatively inexperienced venture capital firms and the effect of proximity on soft information production. We show that these phenomena are closely related. Inexperienced VC firms—those with the strongest incentives to grandstand— tend to match with young and small companies within close proximity, presumably to enhance soft information production. This finding suggests a tradeoff between the benefits of better information production and costs of grandstanding. We show empirically that, (only) after controlling for endogeneity in the choice of proximity, venture backed companies that are close to their lead venture capital firm have substantially lower first day initial returns. Our findings thus explain why portfolio companies choose venture capitalists with incentives to grandstand, despite the large expected costs of doing so. JEL Codes: G24, D80
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