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How Does Uncertainty Resolution Affect VC Syndication?
Author(s) -
Altintig Z. Ayca,
Chiu HsinHui,
Goktan M. Sinan
Publication year - 2013
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12007
Subject(s) - syndicate , certification , web syndication , venture capital , collusion , diversification (marketing strategy) , business , industrial organization , affect (linguistics) , economics , finance , marketing , management , linguistics , philosophy
We use the external certification due to the FDA 510(k) clearance process in the medical device industry as a natural experiment and analyze the dynamics of the syndicate formation of venture capital (VC) firms under various levels of uncertainty. We test several nonmutually exclusive hypotheses on project selection, second opinion, collusion, and diversification. Our results suggest that FDA 510(k) clearance serves as an outside certification and reduces uncertainty leading to greater amounts of capital flowing into the company from a larger group of investors. Our results also suggest that experienced VC firms are able to identify promising projects early on without the need for external 510(k) certification or second opinion.