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

  • Laura Bottazzi
  • Marco Da Rin
  • Thomas Hellmann

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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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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