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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, School of Economics and Management)

  • Hellmann, T.

Abstract

We develop a theory and empirical test of how the legal system affects the relationship between a venture investor and an entrepreneur. 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, and they develop more value-adding skills. These predictions are stongly supported by the empirical analysis. We also find that the investor s legal system is more important that of the company in determining these effects, and that legal system effects persist within civil law countries.
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  • Bottazzi, L. & Da Rin, M. & Hellmann, T., 2009. "What is the role of legal systems in financial intermediation? Theory and evidence," Other publications TiSEM ab9b328a-050d-45b6-be20-7, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:ab9b328a-050d-45b6-be20-73f7e77ad367
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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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