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Review of Financial Studies Vol. 27 No. 1 2014

Informational Holdup and Performance Persistence in Venture Capital

Yael V. Hochberg1; Alexander Ljungqvist2,3; Annette Vissing-Jørgensen

1 Northwestern University · 2 Center for Economic and Policy Research · 3 New York University

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.

DOI
10.1093/rfs/hht046
Volume
27
Issue
1
Pages
102-152
Language
en
Sources
openalex crossref

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