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

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  • Laura Bottazzi
  • Marco Da Rin
  • Thomas Hellmann

Abstract

How does the relationship between an investor and entrepreneur depend on the legal system? In a double moral hazard framework, we show how optimal contracts, corporate governance, and investor actions depend on the legal system. With better legal protection, investors give more non-contractible support, demand more downside protection, and exercise more governance. Investors in better legal systems develop stronger governance and support competencies. Therefore, when investing in a different legal systems they behave differently than local investors. We test these predictions using a hand-collected dataset of European venture capital deals. The empirical results confirm the predictions of the model.

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Bibliographic Info

Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 283.

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Date of creation: 2005
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Handle: RePEc:igi:igierp:283

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Citations

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Cited by:
  1. Dessi, Roberta, 2011. "Innovation, Spillovers and Venture Capital Contracts," TSE Working Papers, Toulouse School of Economics (TSE) 11-253, Toulouse School of Economics (TSE), revised Dec 2013.
  2. L. Bottazzi & M. Da Rin & T. Hellmann, 2007. "The Importance of Trust for Investment: Evidence from Venture Capital," Working Papers 612, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Da Rin, M. & Nicodano, G. & Sembenelli, A., 2006. "Public policy and the creation of active venture capital markets," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-192935, Tilburg University.
  4. Da Rin, Marco & Hege, Ulrich & Llobet, Gerard & Walz, Uwe, 2005. "The law and finance of venture capital financing in Europe: findings from the RICAFE research project," MPRA Paper 39552, University Library of Munich, Germany.
  5. Marco Da Rin & María Fabiana Penas, 2007. "The Effect of Venture Capital on Innovation Strategies," NBER Working Papers 13636, National Bureau of Economic Research, Inc.
  6. Dessi, Roberta, 2011. "Innovation, Spillovers and Venture Capital Contracts," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 684, Institut d'Économie Industrielle (IDEI), Toulouse, revised Dec 2013.
  7. Hege, Ulrich & Palomino, Frederic & Schwienbacher, Armin, 2009. "Venture capital performance: the disparity between Europe and the United States," MPRA Paper 39551, University Library of Munich, Germany.
  8. Cumming, Douglas & Schmidt, Daniel & Walz, Uwe, 2010. "Legality and venture capital governance around the world," Journal of Business Venturing, Elsevier, vol. 25(1), pages 54-72, January.
  9. Cumming, Douglas & Johan, Sofia Atiqah binti, 2008. "Preplanned exit strategies in venture capital," European Economic Review, Elsevier, Elsevier, vol. 52(7), pages 1209-1241, October.

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