Signaling in joint venture capital: a social network perspective
| Published date | 04 December 2017 |
| Date | 04 December 2017 |
| Pages | 2340-2363 |
| DOI | https://doi.org/10.1108/IMDS-09-2016-0359 |
| Author | Jing Wu,He Li,Haichao Zheng,Yun Xu |
| Subject Matter | Information & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems |
Signaling in joint venture capital:
a social network perspective
Jing Wu
Southwestern University of Finance and Economics, Chengdu, China
He Li
Department of Business Information and Technology, The University of Memphis,
Memphis, Tennessee, USA, and
Haichao Zheng and Yun Xu
Southwestern University of Finance and Economics, Chengdu, China
Abstract
Purpose –Based on the theory of social networks, it is crucial to enhance information superiority through
joint venture capital (VC). The purpose of this paper is to explore the impacts of differentroles’structural and
relational embeddedness on the information superiority of joint VC alliances.
Design/methodology/approach –The authors design the multiple linear regression models to investigate
the leader’s investment ratio from a network embeddedness perspective. Panel data analysis and robustness
tests are adopted based on the data from Chinese VCs Database.
Findings –The results show that VC leaders enjoy information search advantages because of their better
network positions, while their followers lack this superiority. Information sharing among investors and
investeesmay enhance the influencesof structural embeddednesson investors’informatio n search advantages.
Joint VC’s scale and itsnumber of leaders could also increase VCalliances’information superiority.
Originality/value –This research provides a more holistic understanding of the formation of joint VC
alliances’information superiority from a social network perspective. Both VC managers and social planners
can seek guidance from this study to implement better strategies and policies to promote information
symmetry in the VC market.
Keywords Venture capital, Social network analysis, Information superiority, Network embeddedness
Paper type Research paper
1. Introduction
Venture capital (VC) refers to the financial capital provided to start-up firms and small
businesses with perceived potential for long-term growth. VC is a crucial source of funding
for startup firms with less access to financial support. It typically generates above-average
returns, but it also entails high risk for VC investors. Generally, VC firms jointly invest in
the same investment round by working together in syndicates of no fewer than two firms
(Terjesen et al., 2013). Depending on the informational and resource-based advantages of
joint ventures, VC alliances could alleviate the financial constraints, improve financial status
and operating performance, and reduce investment risks for members (Baum et al., 2000;
Chen et al., 2015; Powell et al., 1996; Stiglitz, 2002).
Despite these well-known benefits that strategic alliances confer on VC firms, critical
obstacles remainto making full use of alliances’advantages. Two importantfactors impeding
collaborative advantage are the problems of adverse selection and moral hazard (e.g. Elitzur
and Gavious, 2003;Ozmel et al., 2013). Adverse selectionmay arise between a VC alliance and
its investee whenthere is information asymmetry regarding the investee’s potential (An et al.,
2011; Basu and Chau, 1999), because VC firms without sufficient resources have difficulty
effectively evaluating investees. In addition, given that maintaining effective communication
Industrial Management & Data
Systems
Vol. 117 No. 10, 2017
pp. 2340-2363
© Emerald PublishingLimited
0263-5577
DOI 10.1108/IMDS-09-2016-0359
Received 5 October 2016
Revised 5 March 2017
Accepted 18 March 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
This research is supported by a Major Program of National Natural Science Foundation of China
(91218301), the Fundamental Research Funds for the Central Universities ( JBK120505), and the
Collaborative Innovation Center for the Innovation and Regulation of Internet-based-Finance.
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IMDS
117,10
with partners and collecting useful information entail some costs (Gnyawali and Madhavan,
2001; Soda et al., 2004), and it is difficultfor other alliance membersto observe their behaviors
(Sufi, 2007), the moral hazard problem is more likely to appear among alliance members
(Holmstitom and Tirole, 1997; Holmstrom, 1979). Both moral hazard and adverse selection
problems are likely to increase the project’s investment risk and the followers’perceived loss
(Nicholson et al.,2005;Ozmel,et al., 2013). These problems in essence are caused by the
information asymmetry at different levels, including the asymmetry between investors and
investees (i.e. the cause of adverse selection) and the asymmetry among members in a VC
alliance (i.e. the reason of moral hazard).
To reduce the possibilities of adverse selection and moral hazard, VC firms can enhance
their information superiority since it could effectively solve the information asymmetry
problem. From a business perspective, information superiority can be defined as
“the capability to collect, process, and disseminate an uninterrupted flow of information
while exploiting or denying an adversary’s ability to do the same (Alberts, 2008).”When a
VC alliance has a higher level of information superiority, it is less likely to invest in
lower-quality projects (adverse selection) because it has the ability to obtain more accurate
and private information (which can decrease the information asymmetry problem) about
the investee. Although there are the positive impacts of information superiority on VC firms’
performances (e.g. Gompers et al., 2009; Polidoro et al., 2011; Kogut, 1989), it is still not clear
about the antecedents of information superiority. To this end, we are going to explore the
factors that predict the information superiority of VC alliances.
Drawing on the theoretical lens of network embeddedness (Baum and Cowan, 2010;
McEvilyandMarcus,2005),VCfirms’netwo rk connections can promote the
complementarity of investors’heterogeneous knowledge structures . Thus, network
embeddedness may be useful in enhancing the information superiority of a VC alliance
(Polidoro et al., 2011). Prior literature on VC alliances from network embeddedness
perspectives has examined the effects of structural and relational embeddedness in the
separate streams of research (Hallen et al., 2014; Jääskeläinen and Maula, 2014; Ozmel et al.,
2013). In addition, most of these previous related studies treat members in the same alliance
equally. However, different members, even in the same VC alliance, have various levels of
investment ratio, and thus exhibit different behaviors and risks.
Therefore, we are prompted to investigate the following research question:
RQ1. How do different roles of the network embeddedness affect the information
superiority of a VC alliance?
To answer the research question, we investigate the impacts of both structural and
relational embeddedness on VC alliances’information superiority. We consider three main
groups of alliance members based on their different investment ratios. Leaders are the VC
firms with the largest investment ratio in the alliance. Leaders play a critical role in filling
the information gap between investors and investees. The alliance members who have the
best network locations among all followers are defined as “herd leaders”by considering the
herding effects phenomenon. All the other members in an VC alliance in addition to leaders
and herd leaders are denoted as followers. The influences of different members’network
embeddedness on information superiority are theoretically hypothesized after a thorough
literature review. The hypotheses were tested by analyzing the Chinese joint VC market
data during the years 2000-2013.
Our results demonstrate the different impacts of different roles’network embeddedness
on a VC alliance’s information superiority. Leaders have information search advantages
based on their network positions, while followers lack this superiority. In addition,
information sharing among investors and investees may enhance information search
advantages. Our results provide a more comprehensive understanding of the influences of
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