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What is the role of legal systems in financial intermediation? Theory and evidence

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  • Bottazzi, L.
  • Da Rin, M.

    (Tilburg University)

  • Hellmann, T.

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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Bibliographic Info

Paper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-382980.

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Date of creation: 2009
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Publication status: Published in Journal of Financial Intermediation (2009) v.18, p.559-598
Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-382980

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Web page: http://www.tilburguniversity.edu/

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References

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Citations

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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, vol. 31(6), pages 1777-1799.
  2. A. Heughebaert & T. Vanacker & S. Manigart, 2012. "Institutional Frameworks, Venture Capital and the Financing of European New Technology-Based Firms," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/809, Ghent University, Faculty of Economics and Business Administration.
  3. Tykvová, Tereza & Schertler, Andrea, 2011. "Cross-border venture capital flows and local ties: Evidence from developed countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(1), pages 36-48, February.
  4. L. Bottazzi & M. Da Rin & T. Hellmann, 2007. "Who are the active investors? Evidence from Venture Capital," Working Papers 611, Dipartimento Scienze Economiche, Universita' di Bologna.
  5. Marco Da Rin & Thomas F. Hellmann & Manju Puri, 2011. "A survey of venture capital research," NBER Working Papers 17523, National Bureau of Economic Research, Inc.
  6. Bengtsson, Ola & Sensoy, Berk A., 2009. "Investor Abilities and Financial Contracting: Evidence from Venture Capital," Working Paper Series 2009-22, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  7. Achleitner, Ann-Kristin & Engel, Nico & Reiner, Uwe, 2013. "The performance of venture capital investments: Do investors overreact?," Review of Financial Economics, Elsevier, vol. 22(1), pages 20-35.
  8. 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.
  9. Roman Kraussl & Stefan Krause, 2013. "Has Europe Been Catching Up? An Industry Level Analysis of Venture Capital Success over 1985-2009," LSF Research Working Paper Series 13-6, Luxembourg School of Finance, University of Luxembourg.
  10. Bottazzi, L. & Da Rin, M. & Hellmann, T., 2010. "The Importance of Trust for Investment: Evidence From Venture Capital (Revision of DP 2009-43)," Discussion Paper 2010-49, Tilburg University, Center for Economic Research.
  11. Schertler, Andrea & Tykvová, Tereza, 2011. "Venture capital and internationalization," International Business Review, Elsevier, vol. 20(4), pages 423-439, August.

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