Abstract
We argue that strong indirect ties are conducive to the transfer of private information, which provides an advantage in identifying profitable investment opportunities. In our context, a strong indirect tie is generated between an investor and a focal firm if the investor was a limited partner of the focal firm’s lead venture capital fund. We suggest that an investor can access private information on the focal firm’s underlying value through its strong indirect tie to the focal firm via the focal firm’s lead venture capitalist. Supporting our theory, we show that after the focal firm’s initial public offering, the investor with a strong indirect tie to the focal firm receives high risk-adjusted return when the investor chooses to invest in the focal firm’s stock in the stock exchange market. We also show that the investor’s private information attained through its strong indirect tie to the focal firm is more valuable (i) when there is higher exogenous market uncertainty and (ii) when the investor faces higher information asymmetry.
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