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Reducing Information Frictions in Venture Capital: The Role of New Venture Competitions

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  • Sabrina T. Howell

Abstract

Venture capital, an important source of financing for potentially high-growth new businesses, is believed to suffer from information frictions. This paper quantifies the magnitude of these frictions among participants in new venture competitions. In a regression discontinuity design with data from 87 competitions, winning a round increases the chances of external financing by about 35 percent. Winning is most impactful for ventures ranked just above the cutoff but that receive no cash prize, and judge ranks strongly predict venture success. The results indicate that information problems in new venture finance are large, and competitions can help resolve them through certification.

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  • Sabrina T. Howell, 2017. "Reducing Information Frictions in Venture Capital: The Role of New Venture Competitions," NBER Working Papers 23874, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23874
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    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G4 - Financial Economics - - Behavioral Finance
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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