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Venture Cycles: Theory and Evidence

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  • Thomas Gehrig
  • Rune Stenbacka

Abstract

We demonstrate how endogenous information acquisition in venture capital markets creates investment cycles when competing financiers undertake their screening decisions in an uncoordinated way, thereby highlighting the role of intertemporal screening externalities induced by competition among venture capitalists as a structural source of instability. We show that uncoordinated screening behavior of competing financiers is an independent source of fluctuations inducing venture investment cycles. We also empirically document the existence of cyclical features in a number of industries such as biotechnology, electronics, financial services, healthcare, medical services and consumer products.

Suggested Citation

  • Thomas Gehrig & Rune Stenbacka, 2003. "Venture Cycles: Theory and Evidence," CESifo Working Paper Series 882, CESifo.
    • Handle: RePEc:ces:ceswps:_882
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    14. Gehrig, Thomas & ,, 2001. "Screening Cycles," CEPR Discussion Papers 2915, C.E.P.R. Discussion Papers.
    15. Laura Bottazzi & Marco Da Rin, 2002. "Venture capital in Europe and the financing of innovative companies [‘Robust financial contracting and the role of venture capitalists’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 17(34), pages 229-270.
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    Cited by:

    1. Simon K. Medcalfe & Mark A. Thompson, 2017. "Further evidence on the geographical concentration of venture capital investments," Letters in Spatial and Resource Sciences, Springer, vol. 10(2), pages 229-235, July.
    2. Yrjö Koskinen & Michael J. Rebello & Jun Wang, 2014. "Private Information and Bargaining Power in Venture Capital Financing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 23(4), pages 743-775, December.
    3. Gehrig, Thomas & Stenbacka, Rune, 2011. "Decentralized screening: Coordination failure, multiple equilibria and cycles," Journal of Financial Stability, Elsevier, vol. 7(2), pages 60-69, June.
    4. Dietz, Martin D., 2003. "Screening and advising by a venture capitalist with a time constraint," CFS Working Paper Series 2003/48, Center for Financial Studies (CFS).

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    Keywords

    screening; venture capital; investment cycles;
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