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

Author Info

Listed author(s):
  • 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.

(This abstract was borrowed from another version of this item.)

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Paper provided by Tilburg University, School of Economics and Management in its series Other publications TiSEM with number ab9b328a-050d-45b6-be20-73f7e77ad367.

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Date of creation: 2009
Publication status: Published in Journal of Financial Intermediation (2009), v.18, nr.4, p.559-598
Handle: RePEc:tiu:tiutis:ab9b328a-050d-45b6-be20-73f7e77ad367
Contact details of provider: Web page: https://www.tilburguniversity.edu/about/schools/economics-and-management/

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Find related papers by 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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