Propagation Of Financial Shocks: The Case Of Venture Capital

Date Added: Dec 2010
Format: PDF

The non-transferable information that financial intermediaries accumulate about their investments can lead portfolio companies to become locked-in. As a result, companies can become vulnerable to exogenous fluctuations in the health of their intermediaries. The author studies these issues in the context of venture capital, where informational problems are particularly severe. Specifically, the author investigates the effect of the collapse of the technology bubble on non-IT companies that were financed by venture firms with high exposure to the internet sector. Using semi-parametric survival analyzes the author estimate that the end of the bubble was associated with a 26% larger decline in the hazard of raising a follow-on round for these non-IT companies in comparison to others.