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Investor protection and business creation

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Author Info
Ari Hyytinen (Research Institute of the Finnish Economy ETLA & Etlatieto Ltd)
Tuomas Takalo (Bank of Finland)

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Abstract

We study the effects of investor protection on the availability of external finance, entrepreneurship, and creation of new firms in an equilibrium search model of private capital markets. In addition to search frictions, we examine contract frictions, specifically interim and ex post moral hazard problems stemming from entrepreneurs’ possibilities to expropriate financiers. In our model, the government chooses the level of investor protection that determines the transferability of match surplus between entrepreneurs and financiers. The results indicate that anything that increases (decreases) entrepreneurship also increases (decreases) the creation of start-ups. The effect of investor protection on the creation of start-ups thus hinges on the relative importance of various search and contract frictions. Only when investor protection has a sufficiently large impact on the ex post moral hazard problem relative to the interim moral hazard does strengthening investor protection enhance start-up creation. We also find that search frictions dilute the beneficial effect of investor protection and that contract frictions modify the standard Hosios condition for efficiency.

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Paper provided by EconWPA in its series Finance with number 0404021.

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Date of creation: 29 Apr 2004
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Handle: RePEc:wpa:wuwpfi:0404021

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Related research
Keywords: investor protection; start-up financing; private equity market; entrepreneurship; corporate finance;

Other versions of this item:

Find related papers by JEL classification:
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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References listed on IDEAS
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. Rafael La porta & Florencio Lopez-De-Silanes & Andrei Shleifer & Robert Vishny, 2002. "Investor Protection and Corporate Valuation," Journal of Finance, American Finance Association, vol. 57(3), pages 1147-1170, 06. [Downloadable!] (restricted)
    Other versions:
  2. Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Harvard Institute of Economic Research Working Papers 1788, Harvard - Institute of Economic Research.
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  3. Josh Lerner, 1996. "The Government as Venture Capitalist: The Long-Run Effects of the SBIR Program," NBER Working Papers 5753, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Johansson, Edvard, 2000. " Self-Employment and Liquidity Constraints: Evidence from Finland," Scandinavian Journal of Economics, Blackwell Publishing, vol. 102(1), pages 123-34, March. [Downloadable!] (restricted)
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  21. Fonseca, Raquel & Lopez-Garcia, Paloma & Pissarides, Christopher A., 2001. "Entrepreneurship, start-up costs and employment," European Economic Review, Elsevier, vol. 45(4-6), pages 692-705, May. [Downloadable!] (restricted)
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  28. Innes, Robert, 1991. "Investment and government intervention in credit markets when there is asymmetric information," Journal of Public Economics, Elsevier, vol. 46(3), pages 347-381, December. [Downloadable!] (restricted)
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Full references

Cited by:
(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. Markku Stenborg, 2004. "Are There Biases in the Market Definition Procedure?," Discussion Papers 903, The Research Institute of the Finnish Economy. [Downloadable!]
  2. Tomi Hussi, 2004. "A Managerial Relevance of Maintenance of Work Abilility. A Finnish Perspective," Discussion Papers 897, The Research Institute of the Finnish Economy. [Downloadable!]
  3. Kari Alho, 2004. "The Finnish EMU Buffers and the Labour Market under Asymmetric Shocks," Discussion Papers 914, The Research Institute of the Finnish Economy. [Downloadable!]
  4. Mika Maliranta & Satu Nurmi, 2004. "Analyzing Entrepreneurship with the Finnish Linked Employer-Employee Data (FLEED).Matching and qualitative properties of the data," Discussion Papers 920, The Research Institute of the Finnish Economy. [Downloadable!]
  5. Liisa Leijola, 2004. "The Education System in Finland - Development and Equality," Discussion Papers 909, The Research Institute of the Finnish Economy. [Downloadable!]
  6. Petri Rouvinen & Pekka Tsupari, 2004. "Inter-firm Collaboration and Electronic Business: Effects on Profitability in Finalnd," Discussion Papers 895, The Research Institute of the Finnish Economy. [Downloadable!]
  7. Petri Rouvinen, 2004. "Diffusion of Digital Mobile Telephony - Are Devoloping Countries Different?," Discussion Papers 901, The Research Institute of the Finnish Economy. [Downloadable!]
    Other versions:
  8. Antti-Jussi Tahvanainen, 2004. "Academic Spin-offs in Finnish Biotechnology," Discussion Papers 900, The Research Institute of the Finnish Economy. [Downloadable!]
  9. Hannu Piekkola, 2004. "Active Ageing Policies in Finland," Discussion Papers 898, The Research Institute of the Finnish Economy. [Downloadable!]
  10. Pekka Ylä-Anttila & Jyrki Ali-Yrkkö & Martti Nyberg, 2004. "Foreign Ownership in Finland - Boosting Firm Performance and Changing Corporate Governance," Discussion Papers 904, The Research Institute of the Finnish Economy. [Downloadable!]
  11. Jyrki Ali-Yrkkö & Ari Hyytinen & Mika Pajarinen, 2004. "Does Patenting Increase the Probability of Being Acquired? Evidence from Cross-border and Domestic Acquisitions," Discussion Papers 891, The Research Institute of the Finnish Economy. [Downloadable!]
    Other versions:
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