The Importance of Trust for Investment: Evidence from Venture Capital

By L. Bottazzi, M. Rin, Thomas F. Hellmann. 2016

499 citations recorded by the source corpus.

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.

Subfields: Accounting, Management Information Systems

View Paper: https://www.semanticscholar.org/paper/7dc0d07402e38cd5366c9d4dc67f42d8c0621b62

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Citations in the corpus

Societal Trust and Management Earnings Forecasts (2020, background): “Similarly, Bottazzi et al. (2016) show that trust has a significant effect on the investment decisions of venture capital firms.”
National Culture and Corporate Cash Holdings around the World (2015, background): “Studies in this strand have examined the impact of cultural values on economic outcomes, more specifically, corporate decisions (Guiso et al., 2009; Bottazzi et al., 2010; Giannetti and Yafeh, 2012; Ahern et al., forthcoming).”
When Firms Talk, Do Investors Listen? The Role of Trust in Stock Market Reactions to Corporate Earnings Announcements (2012, background): “…in the stock market, and facilitates venture capital investment, corporate financing, and cross-border mergers and acquisitions (Knack and Keefer (1997) and Zak and Knack (2001), Guiso, Sapienza, and Zingales (2004, 2008), Bottazzi et al. (2011), Duarte et al. (2010) and Ahern et al. (2012)).”
Societal trust and corporate tax avoidance (2018, unknown): “2008), corporate financing and merger and acquisition (M&A) transactions (Bottazi et al. 2011; Ahern et al. 2013; Duarte et al. 2012).”
Bank relationships, business cycles, and financial crises (2011, background): “(2009) offers a theoretical model of networks in social interactions, while papers by Bottazzi et al. (2009); Guiso et al. (2009) and Lehmann & Neuberger (2001) provide some discussion of the importance of trust and social interactions for investment, economic exchange, and lending.”
Determinants of Cross-Border Venture Capital Investments in Emerging and Developed Economies: The Effects of Relational and Institutional Trust (2015, unknown): “Recently Duffner et al. (2009) and Bottazzi et al. (2011) also provide empirical evidence showing a strong statistical and economic significance of trust on venture capital investments, reporting generalized and personalized trust ex-ante to reduce doubts regarding an investment decision and…”
Economic Nationalism in Mergers and Acquisitions (2013, unknown): “and Bottazzi et al. (2008) demonstrate the importance of trust in cross-border financial”