Journal Article

Geographic distance between venture capitalists and target firms and the value of quality signals

Christos Kolympiris, Sebastian Hoenen and Nicholas Kalaitzandonakes

in Industrial and Corporate Change

Volume 27, issue 1, pages 189-220
Published in print February 2018 | ISSN: 0960-6491
Published online February 2017 | e-ISSN: 1464-3650 | DOI: https://dx.doi.org/10.1093/icc/dtw057
Geographic distance between venture capitalists and target firms and the value of quality signals

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  • Information, Knowledge, and Uncertainy
  • Investment Banking
  • Technological Change; Research and Development
  • Manufacturing
  • Urban, Rural, and Regional Economics

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Abstract

In this paper, we examine whether the value of quality signals (patent activity and founding team characteristics) transmitted by emerging biotechnology firms is influenced by the geographic distance between venture capitalists and biotechnology firms. In line with the notion that signals are more valuable to receivers in environments of elevated information asymmetries and under the premise that long-distance transactions present such an environment, we empirically reveal that patent activity and founding team entrepreneurial experience are more effective in increasing venture capital investments when the distance between investors and investees is elevated. Our results, therefore, corroborate the rationale that because tacit knowledge circulates mostly within local circles, it diminishes the value of signals for local transactions, as a priori knowledge about potential target firms is more easily assessed by investors. Our study contributes to the literature on the factors that drive the value of signals, on the literature that studies the function of patents and other forms of intellectual property as a means to boost firm performance, and on the literature on the geography of venture capital investments.

Keywords: D82; G24; O34; L65; R12

Journal Article.  16085 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Investment Banking ; Technological Change; Research and Development ; Manufacturing ; Urban, Rural, and Regional Economics

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