Reputation and Opportunistic Behavior in the VC Industry

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2012-07-25

Summary:

Editor’s Note: The following post comes to us from Vladimir Atanasov of the Mason School of Business at the College of William and Mary; Vladimir Ivanov of the U.S. Securities and Exchange Commission; and Kate Litvak, Professor of Law at Northwestern University.

In the paper, Does Reputation Limit Opportunistic Behavior in the VC Industry? Evidence from Litigation against VCs, forthcoming in the Journal of Finance, we use a hand-collected database of lawsuits filed against U.S. venture capitalists (VCs) to examine the role of reputation in limiting opportunism in the VC industry. The lawsuits in our sample serve as a proxy for alleged opportunistic behavior by the defendant VCs. Based on the lawsuit plaintiff, we further identify whether the defendant VCs allegedly behaved opportunistically against founders, limited partners, other VCs, buyers of VC-backed startups, or other parties (angels, creditors, employees, etc.).

We choose proxies for VC reputation (or alternatively the intensity of VC relationships) with each of the four main types of plaintiffs as follows. First, the number of deals that a VCs invests in serves as proxy for the VC’s reputation with founders. Second, we use the amount of funds under management to proxy for the VC's reputation with limited partners. Third, the VC’s network centrality, defined as the scaled number of relationships that a VC has with other VCs, serves as proxy for the VC’s reputation with other VCs. Last, we use the percentage of companies in the VC’s portfolio that go public to proxy for the VC’s reputation with buyers of VC-backed startups.

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Link:

http://blogs.law.harvard.edu/corpgov/2012/07/25/reputation-and-opportunistic-behavior-in-the-vc-industry/

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Tags:

reputation academic research empirical research institutional investors venture capital firms contracts kate litvak vladimir atanasov vladimir ivanov

Authors:

R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation,

Date tagged:

07/25/2012, 11:00

Date published:

07/25/2012, 09:20