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Peer Monitoring, Syndication, and the Dynamics of Venture Capital Interactions: Theory and Evidence

  • Onur Bayar, Thomas J. Chemmanur and Xuan Tian

Abstract

We develop a theoretical model providing a new rationale for venture capitalist (VC) syndicate formation and empirically test our model predictions. An entrepreneur obtains financing and two different value-adding inputs from a single VC or from two different VCs, each operating in his area of expertise. We characterize the entrepreneur’s equilibrium choice between contracting with a single VC, individually with multiple VCs, or with a VC syndicate. We show that syndicates mitigate VCs’ moral hazard problem in value addition. We also analyze the dynamics of VC syndicate composition. The results of our empirical analysis are consistent with our model’s predictions.

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Corresponding author

*Bayar, onur.bayar@utsa.edu, University of Texas at San Antonio College of Business; Chemmanur (corresponding author), chemmanu@bc.edu, Boston College Carroll School of Management; and Tian (corresponding author), tianx@pbcsf.tsinghua.edu.cn, Tsinghua University PBC School of Finance.

Footnotes

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1

For helpful comments and discussions, we thank Paolo Fulghieri, Jarrad Harford (the editor), Shan He, Gang Hu, Yawen Jiao, Karthik Krishnan, Elena Loutskina, Debarshi Nandy, S. Abraham Ravid (the referee), Karen Simonyan, and Chris Yung. We also thank seminar participants at Boston College, Essex University, and Indiana University, as well as conference participants at the Kauffman-RFS Entrepreneurial Finance and Innovation Conference at Boston and the Financial Management Association Meetings. We remain responsible for all errors and omissions. Chemmanur acknowledges funding from a Hillenbrand Distinguished Fellowship. Tian acknowledges financial support from the National Natural Science Foundation of China (Grant Nos. 71825002, 71790591, and 91746301) and Tsinghua University (Research Grant No. 20151080451). An earlier version of this article was circulated under the title “Peer Monitoring, Syndication, and the Dynamics of Venture Capitalist Interactions.”

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