How Does Uncertainty Resolution Affect VC Syndication?

Authors

  • Z. Ayca Altintig,

  • Hsin-Hui Chiu,

  • M. Sinan Goktan

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    • *Z. Ayca Altintig is an Assistant Professor of Finance at the Peter F. Drucker and Masatoshi Ito Graduate School of Management at Claremont Graduate University in Claremont, CA. Hsin-Hui Chiu is an Assistant Professor of Finance at the College of Business and Economics at California State University Northridge in Northridge, CA. M. Sinan Goktan is an Assistant Professor of Finance at the College of Business and Economics at California State University East Bay in Hayward, CA.


  • We would like to thank an anonymous referee, Jack Broughton, Bill Christie (Editor) Grigori Erenburg, and Clas Wihlborg for various readings of the paper and all their comments. We also would like to thank conference participants at the 2010 Financial Management Association meetings, the 2011 Midwest Financial Association, Academy of Entrepreneurial Finance and California Corporate Finance Conference, as well as seminar participants at Chapman University, St. Mary's College of California, University of New Haven, Trinity University, and the Drucker School of Management.

Abstract

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.

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