Career Concerns and Staged Investment: Evidence from the Venture Capital Industry

Format:Print
| Language:English

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.