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What is the Role of Legal Systems in Financial Intermediation? Theory and Evidence

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Author Info
Bottazzi, L.
Da Rin, M.
Hellmann, T. (Tilburg University, Center for Economic Research)

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Abstract

We develop a theory and empirical test of how the legal system affects the relationship between venture capitalists and entrepreneurs. The theory uses a double moral hazard framework to show how optimal contracts and investor actions depend on the quality of the legal system. The empirical evidence is based on a sample of European venture capital deals. The main results are that with better legal protection, investors give more non-contractible support and demand more downside protection. These predictions are supported by the empirical analysis. Using a new empirical approach of comparing two sets of fixed-effect regressions, we also find that the investor?s legal system is more important than that of the company in determining investor behavior.

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Publisher Info
Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2008-30.

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Date of creation: 2008
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Handle: RePEc:dgr:kubcen:200830

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Find related papers by JEL classification:
G20 - Financial Economics - - Financial Institutions and Services - - - General
G30 - Financial Economics - - Corporate Finance and Governance - - - General
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
K22 - Law and Economics - - Regulation and Business Law - - - Corporation and Securities Law

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. L. Bottazzi & M. Da Rin & T. Hellmann, 2007. "Who are the active investors? Evidence from Venture Capital," Working Papers 611, Dipartimento Scienze Economiche, Università di Bologna. [Downloadable!]
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