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

Published online by Cambridge University Press:  20 March 2019

Onur Bayar ,
Thomas J. Chemmanur Open the ORCID record for Thomas J. Chemmanur [Opens in a new window]  and
Xuan Tian
Onur Bayar
Affiliation:
Bayar, onur.bayar@utsa.edu, University of Texas at San Antonio College of Business
Thomas J. Chemmanur*
Affiliation:
Chemmanur, chemmanu@bc.edu, Boston College Carroll School of Management
Xuan Tian*
Affiliation:
Tian, tianx@pbcsf.tsinghua.edu.cn, Tsinghua University PBC School of Finance
*
Chemmanur (corresponding author), chemmanu@bc.edu
Tian (corresponding author), tianx@pbcsf.tsinghua.edu.cn
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 6 , September 2020 , pp. 1875 - 1914
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

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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