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Other Unpublished Work
| 2000
Career Concerns and Staged Investment: Evidence from the Venture Capital Industry
by
Malcolm Baker
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Abstract
I develop a model in which career concerns lead to inefficient reinvestment decisions. Managers have incentives to inflate interim returns by continuing bad projects and delaying write-offs. In the venture capital industry, the syndication of follow-on investments can help to solve this problem by providing an intermediate, arm's-length valuation. The evidence suggests that young venture firms do use syndication to certify investment quality. Moreover, the gap in quality between syndicated and non-syndicated investments -- measured by ex post outcomes -- is especially high for young venture firms, consistent with the hypothesis that career concerns reduce the efficiency of staged investment.
Keywords: Performance Efficiency;
Valuation;
Venture Capital;
Investment;
Decisions;
Motivation and Incentives;
Quality;
Personal Development and Career;