Employment ties and investor trust: decoding the role of social signalling

Securing funding is a critical challenge for entrepreneurs, often exacerbated by information asymmetry between investors and entrepreneurs. This research uses a dataset of 411 private equity cases to investigate whether direct and indirect employment ties influence investment decisions through the mediating roles of reputation, social obligation, and social signaling. Our findings highlight social signaling, which reflects the symbolic credibility of affiliations with reputable organizations, as the dominant mechanism in reducing uncertainty and shaping investor trust. In contrast to prior research that emphasizes reputation (Podolny, 1994; Stuart, Hoang, & Hybels, 1999) and social obligation (Gulati, 1995; Shane & Cable, 2002) as key mediators, we find these mechanisms do not independently mediate the effects of employment ties when social signaling is considered. By extending signaling theory (Spence, 1973) to the context of organizational behavior, we demonstrate the importance of symbolic associations in driving decision-making in uncertain, high-stakes environments. These insights provide practical guidance for entrepreneurs and investors seeking to navigate trust and credibility in organizational settings.