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Institutional investments in private equity funds: social ties and the reduction of information asymmetry
Journal
Venture Capital: An International Journal of Entrepreneurial Finance
ISSN
1369-1066
ISSN-Digital
1464-5343
Type
journal article
Date Issued
2012-01-31
Author(s)
Freiburg, Markus
Abstract
The reduction of information asymmetry between institutional investors and private equity (PE) firms is one of the key challenges for the successful fundraising of PE funds in an increasingly competitive market. Social ties provide a potential mechanism to reduce information asymmetry. Therefore, this paper investigates the role of social ties for institutional investments in PE funds. Based on our fieldwork and a data set of 136 institutional investors and PE firms in Germany, we show that both direct and indirect social ties influence the investment decisions of institutional investors for PE firms. This influence is not restricted to functions of information transfer but also includes mechanisms of trust building. Interestingly, direct and indirect ties reveal different effects. Direct ties transfer information and increase goodwill trust. Indirect ties also transfer information but show no effect on trust building. Our results suggest that social ties can reduce information asymmetry between institutional investors and PE firms and thereby help to establish a financing relationship.
Language
English
Keywords
private equity
investment decisions
information asymmetry
social networks
information transfer
trust building
HSG Classification
contribution to scientific community
HSG Profile Area
SoM - Business Innovation
Refereed
Yes
Publisher
Taylor & Francis
Publisher place
London UK
Volume
14
Number
1
Start page
1
End page
26
Pages
26
Subject(s)
Division(s)
Eprints ID
207234