TY - JOUR
T1 - Informational holdup and performance persistence in venture capital
AU - Hochberg, Yael V.
AU - Ljungqvist, Alexander
AU - Vissing-Jørgensen, Annette
PY - 2014/1/1
Y1 - 2014/1/1
N2 - 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.
AB - 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.
KW - G24
UR - http://www.scopus.com/inward/record.url?scp=84891444022&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84891444022&partnerID=8YFLogxK
U2 - 10.1093/rfs/hht046
DO - 10.1093/rfs/hht046
M3 - Article
AN - SCOPUS:84891444022
VL - 27
SP - 102
EP - 152
JO - Review of Financial Studies
JF - Review of Financial Studies
SN - 0893-9454
IS - 1
ER -