Informational Holdup and Performance Persistence in Venture Capital

Yael V. Hochberg, Alexander Ljungqvist*, Annette Vissing-Jørgensen

*Corresponding author for this work

    Research output: Contribution to journalJournal articleResearchpeer-review

    Abstract

    Why don't VCs eliminate excess demand for follow-on funds by raising fees? We propose a model of learning that leads to informational holdup. Current investors learn about skill whereas outside investors observe only returns. This gives current investors holdup power when the VC raises his next fund: Without their backing, no-one will fund him, as outside investors interpret the lack of backing as a sign of low skill. Holdup power diminishes the VC's ability to increase fees in line with performance, leading to return persistence. Empirical evidence supports the model. We estimate that up to two-thirds of VC firms lack skill.

    Original languageEnglish
    JournalReview of Financial Studies
    Volume27
    Issue number1
    Pages (from-to)102-152
    Number of pages51
    ISSN0893-9454
    DOIs
    Publication statusPublished - 2014

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