THE ROLE OF INVESTMENT BANKING FOR INVESTMENT – A THEORETICAL REVIEW

Abstract

We examine the effect of trust in venture capital. Our theory predicts a positive relationship
of trust with investment, but a negative relationship with success. Using a hand-collected dataset of European
venture capital deals, we find that the Eurobarometer measure of trust among nations positively predicts
venture capital firms’ investment decisions, but that it has a negative correlation with successful exits. Our
theory also predicts that earlier stage investments require higher trust, that syndication is more valuable in
low-trust situations, and that higher trust investors use more contingent contracts. The empirical evidence
supports these predictions.