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Managing Performance Signals Through Delay: Evidence from Venture Capital

Author

Listed:
  • Indraneel Chakraborty

    (School of Business Administration, University of Miami, Coral Gables, Florida 33124)

  • Michael Ewens

    (Humanities and Social Sciences, California Institute of Technology, Pasadena, California 91125)

Abstract

This paper examines whether agency conflicts during venture capital (VC) fundraising impact investment behavior. Using novel investment-level decisions of VCs in the process of raising new funds, we find that venture capitalists take actions hidden from their investors—i.e., limited partners (LPs)—that delay revealing negative information about VC fund performance until after a new fund is raised. After fundraising is complete, write-offs double and reinvestments in relatively worse-off entrepreneurial firms increase. We find that these observations cannot be explained by strategic bundling of news or effort constraints due to the newly raised fund. Funds with both long and short fundraising track record exhibit this behavior and the delay is costly for fund investors (LPs). This strategic delay shows that fundraising incentives have real impacts on VC fund investment decisions, which are often difficult for LPs to observe.

Suggested Citation

  • Indraneel Chakraborty & Michael Ewens, 2018. "Managing Performance Signals Through Delay: Evidence from Venture Capital," Management Science, INFORMS, vol. 64(6), pages 2875-2900, June.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:6:p:2875-2900
    DOI: 10.287/mnsc.2016.2662
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    8. William Gornall & Ilya A. Strebulaev, 2017. "Squaring Venture Capital Valuations with Reality," NBER Working Papers 23895, National Bureau of Economic Research, Inc.
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