SIFR Research Report Series, Institute for Financial Research
Learning by Investing: Evidence from Venture Capital
Abstract: To understand the investment behavior of venture capital
(VC) investors, this paper estimates a dynamic model of learning. Behavior
reflecting both learning from past investments (exploitation) and
anticipated future learning (exploration) are found to be prevalent, and
the model's additional predictions about success rates and investment
speeds are confirmed empirically. Learning is important, since it can
create informational frictions, and it has potential implications for VCs'
investments and organizations. VCs are found to internalize the value of
learning, and this may help promote exploration beyond the levels sustained
in standard capital markets, which is socially valuable.
Keywords: Venture capital; Learning; Multi-armed bandit model; (follow links to similar papers)
JEL-Codes: D49; D83; G31; (follow links to similar papers)
52 pages, May 15, 2007
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