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Dr. Pavel I. Zhelyazkov
Assistant Professor of Management
Hong Kong University of Science and Technology

Extensive research has demonstrated that organizational actors draw on their social ties in identifying future investment opportunities but has paid less attention to when and how such ties enable superior investment selection. Proceeding from the assumption that any such selection benefits derive from privileged access to private information, we hypothesize that interorganizational ties have their greater effects when the investor faces the highest level of quality uncertainty vis-à-vis the prospective target. We propose three sources of such quality uncertainty: i) lack of investment experience of the evaluator required to accurately assess targets; ii) geographic distance to prospective opportunities, which hinders due diligence processes; and iii) limited activity of the target, which makes it harder to evaluate its track record. We find support for our predictions in a longitudinal study of institutional investors (limited partners) investing in private equity funds. Our study demonstrates the presence of selection benefits of interorganizational ties in a novel empirical context, as well as previously unexplored boundary conditions to their effectiveness.