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 journalArticle

43 Scopus citations

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 (US)
Pages (from-to)102-152
Number of pages51
JournalReview of Financial Studies
Volume27
Issue number1
DOIs
StatePublished - Jan 1 2014

Keywords

  • G24

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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