We examine the effect of trust on financial investment decisions in a micro-economic environment where trust is exogenous. Using hand-collected data on European venture capital, we show that the Eurobarometer measure of trust among nations significantly affects investment decisions. This holds even after controlling for investor and company fixed effects, geographic distance, information and transaction costs. We then consider the relationship between trust and performance, evaluating two competing hypotheses: one based on the notion that higher trust benefits investment performance, the other based on the notion that lack of trust constitutes a hurdle to investments. We find evidence of a negative relationship between trust and exit performance, especially for IPOs. We further show that more sophisticated investors are more likely to make low trust investments, and that by doing so they achieve superior performance. Based on this and some additional evidence we conclude that lack of trust is a hurdle to making venture capital investments, but that investors who overcome this hurdle tend to do well
