Institutional Frameworks, Venture Capital and the Financing of European New Technology-Based Firms

Manuscript Type: Empirical Research Question/Issue: We first study how cross-country differences in legal quality and personal bankruptcy laws affect the financing of New Technology-Based Firms (NTBFs). Second, we study how venture capital (VC) investors, as expert monitors and initiators of good governance practices in their portfolio firms, moderate abovementioned relationships. Research Findings/Insights: Using a unique longitudinal dataset comprising 6,813 NTBFs from six European countries, we find that higher quality legal systems increase the use of outside financing. Less forgiving personal bankruptcy laws decrease the use of outside financing. More importantly, VC ownership strengthens the abovementioned relationships. Theoretical/Academic Implications: This paper provides new evidence on the link between national legal systems and the financing of NTBFs. More significantly, we address recent calls for more research that integrates institutional and agency frameworks. Specifically, this paper shows that the financing of NTBFs is the outcome of both national institutional frameworks and firm-level corporate governance. Practitioner/Policy Implications: NTBFs play a key role in employment and wealth generation in our modern knowledge-based economies. Yet, access to sufficient and adequate financing is a critical barrier in the development of these firms. This study informs policy makers on the role of national institutions, firm-level corporate governance and their interaction on the financing strategies of NTBFs.