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Transaction Structures in the Developing World: Evidence from Private Equity

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  • Lerner, Josh
  • Schoar, Antoinette

Abstract

While variations in public securities markets across nations have attracted increasing scrutiny, private financings have received little attention. But in developing nations, the bulk of financings are private ones. This paper analyzes 210 private equity transactions in developing countries. We find that unlike in the U.S., where convertible preferred securities are ubiquitous, in developing nations a much broader array of securities are employed and private equity investors often have fewer contractual protections. The choice of security appears to be driven by the legal and economic circumstances of the nation and the private equity group. Investments in common law nations are structured similar to those in the U.S., being less likely to employ common stock or straight debt, and more likely to use preferred stock with a variety of covenants. By way of contrast, in nations where the rule of law is less established, private equity groups are likely to use common stock and own the majority of the firm's equity if the investment encounters difficulties. Private equity groups based in the U.S. and U.K. rely more on preferred securities but also adapt transactions to local conditions. These contractual differences appear to have real consequences: larger transactions with higher valuations are seen in common law countries. These findings suggest that the structure of a country's legal system affects private contracts and cannot easily be undone by (bi-lateral) private solutions.

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Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 4468-04.

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Date of creation: 28 May 2004
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Handle: RePEc:mit:sloanp:5070

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA

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  1. Simeon Djankov & Rafael Porta & Florencio de & Andrei Shleifer, 2002. "Courts: The Lex Mundi Project," Yale School of Management Working Papers, Yale School of Management ysm277, Yale School of Management, revised 01 Nov 2003.
  2. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, American Finance Association, vol. 52(3), pages 1131-50, July.
  3. Djankov, Simeon & La Porta, Rafael & Shleifer, Andrei & Lopez de Silanes, Florencio, 2001. "The regulation of entry," Policy Research Working Paper Series 2661, The World Bank.
  4. Gompers, Paul & Lerner, Josh, 2000. "Money chasing deals? The impact of fund inflows on private equity valuation," Journal of Financial Economics, Elsevier, Elsevier, vol. 55(2), pages 281-325, February.
  5. Simon Johnson & John McMillan & Christopher Woodruff, 2001. "Courts and Relational Contracts," NBER Working Papers 8572, National Bureau of Economic Research, Inc.
  6. Steven N. Kaplan & Frederic Martel & Per Stromberg, 2003. "How Do Legal Differences and Learning Affect Financial Contracts?," NBER Working Papers 10097, National Bureau of Economic Research, Inc.
  7. Steven N. Kaplan & Per Stromberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(2), pages 281-315, 04.
  8. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  9. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, American Economic Association, vol. 91(5), pages 1369-1401, December.
  10. Gompers, Paul A, 1995. " Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, American Finance Association, vol. 50(5), pages 1461-89, December.
  11. Jeng, Leslie A. & Wells, Philippe C., 2000. "The determinants of venture capital funding: evidence across countries," Journal of Corporate Finance, Elsevier, Elsevier, vol. 6(3), pages 241-289, September.
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Cited by:
  1. Schertler, Andrea & Tykvová, Tereza, 2012. "What lures cross-border venture capital inflows?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(6), pages 1777-1799.
  2. 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.
  3. Schertler, Andrea & Tykvová, Tereza, 2011. "Venture capital and internationalization," International Business Review, Elsevier, Elsevier, vol. 20(4), pages 423-439, August.
  4. Cinzia Colapinto, 2007. "A way to foster innovation: a venture capital district from Silicon Valley and route 128 to Waterloo Region," International Review of Economics, Springer, Springer, vol. 54(3), pages 319-343, September.
  5. Bottazzi, L. & Da Rin, M. & Hellmann, T., 2004. "Active financial intermediation: Evidence on the role of organizational specialization and human capital," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3159708, Tilburg University.
  6. Irving Fisher Committee, 2009. "Proceedings of the IFC Conference on "Measuring financial innovation and its impact", Basel, 26-27 August 2008," IFC Bulletins, Bank for International Settlements, number 31, October -.

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