Does Social Proximity Enhance Business Partnerships? Theory and Evidence from Ethnicity's Role in U.S. Venture Capital

We develop a formal model to understand the selection and influence effects of social proximity (homophily) between business partners. Consistent with the model's predictions, we find that U.S. venture capitalists (VCs) are more likely to select start-ups with coethnic executives for investment...

Full description

Saved in:
Bibliographic Details
Published in:Management science 2014-09, Vol.60 (9), p.2355-2380
Main Authors: Hegde, Deepak, Tumlinson, Justin
Format: Article
Language:English
Subjects:
Acquisitions
Business entities
Business partnerships
Contrafactuals
Criteria
Entrepreneurs
Entrepreneurship
Ethnicity
Funding
Geography
Going public (Securities)
homophily
Initial public offering
Initial public offerings
Investment analysis
Investment companies
Investment policy
Management science
Minority & ethnic groups
Officials and employees
Partnership
Partnerships
Probability
Selection
Social capital
Social networks
Start up firms
Startups
Studies
Success
U.S.A
Venture capital
Venture capital companies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We develop a formal model to understand the selection and influence effects of social proximity (homophily) between business partners. Consistent with the model's predictions, we find that U.S. venture capitalists (VCs) are more likely to select start-ups with coethnic executives for investment, particularly when the probability of the start-up's success appears low. Ethnic proximity between VCs and the start-ups they invest in is positively related to performance, measured by the probability of the companies' successful exit through acquisitions and initial public offerings (IPOs) and net income after IPO. Two-stage regression estimates suggest that these positive performance outcomes are largely due to influence , that is, superior communication and coordination between coethnic VCs and start-up executives after the investment. To the extent that VCs expect to work better with coethnic start-ups, they invest in coethnic ventures that are of lower observable quality than noncoethnic ventures. This paper was accepted by Lee Fleming, entrepreneurship and innovation .
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2013.1878