Propagation of Financial Shocks: The Case of Venture Capital

Richard R. Townsend ()
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Richard R. Townsend: Tuck School of Business, Dartmouth College, Hanover, New Hampshire 03755

Management Science, 2015, vol. 61, issue 11, 2782-2802

Abstract: This paper investigates how venture-backed companies are affected when others sharing the same investor suffer a negative shock. In theory, companies may be helped or hurt in this scenario. To examine the topic empirically, I estimate the impact of the collapse of the technology bubble on non-information-technology (non-IT) companies that were held alongside IInternet companies in venture portfolios. Using a difference-in-differences framework, I find that the end of the bubble was associated with a significantly larger decline in the probability of raising continuation financing for these non-IT companies in comparison to others. This does not appear to be driven by unobservable company characteristics such as company quality or IT relatedness; for the same portfolio company receiving capital from multiple venture firms, investors with greater Internet exposure were significantly less likely to continue to participate in follow-on rounds. This paper was accepted by Itay Goldstein, operations management.

Keywords: intermediation; contagion; venture capital; technology bubble; Internet; lock-in (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:61:y:2015:i:11:p:2782-2802

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