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How Do Legal Differences and Learning Affect Financial Contracts?

Author

Listed:
  • Kaplan, Steven N.

    (University of Chicago)

  • Martel, Frederic

    (UBS Global Asset Management)

  • Strömberg, Per

    (Swedish Institute for Financial Research)

Abstract
We analyze venture capital (VC) investments in twenty-three non-U.S. countries and compare them to U.S. VC investments. We describe how the contracts allocate cash flow, board, liquidation, and other control rights. In univariate analyses, contracts differ across legal regimes. However, more experienced VCs implement U.S.-style contracts regardless of legal regime. In most specifications, legal regime becomes insignificant controlling for VC sophistication. VCs who use U.S.-style contracts fail significantly less often. The results suggest that U.S.-style contracts are efficient across a wide range of legal regimes. The evolution of contracts is consistent with financial contracting theories and costly learning.

Suggested Citation

  • Kaplan, Steven N. & Martel, Frederic & Strömberg, Per, 2004. "How Do Legal Differences and Learning Affect Financial Contracts?," SIFR Research Report Series 28, Institute for Financial Research.
    • Handle: RePEc:hhs:sifrwp:0028
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    Cited by:

    1. Uwe Walz & Carsten Bienz, 2006. "Evolution of Decision and Control Rights in Venture Capital Contracts: An Empirical Analysis," FMG Discussion Papers dp585, Financial Markets Group.
    2. L. Bottazzi & M. Da Rin & T. Hellmann, 2007. "The Importance of Trust for Investment: Evidence from Venture Capital," Working Papers 612, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. Bottazzi, Laura & Da Rin, Marco & Hellmann, Thomas, 2009. "What is the role of legal systems in financial intermediation? Theory and evidence," Journal of Financial Intermediation, Elsevier, vol. 18(4), pages 559-598, October.
    4. Lerner, Josh & Schoar, Antoinette, 2004. "Transaction Structures in the Developing World: Evidence from Private Equity," Working papers 4468-04, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    5. Jun Qian & Philip E. Strahan, 2007. "How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans," Journal of Finance, American Finance Association, vol. 62(6), pages 2803-2834, December.
    6. Josh Lerner & Antoinette Schoar, 2004. "Transaction Structures in the Developing World," NBER Working Papers 10348, National Bureau of Economic Research, Inc.
    7. Cumming, Douglas J., 2005. "Capital structure in venture finance," Journal of Corporate Finance, Elsevier, vol. 11(3), pages 550-585, June.
    8. John Armour & Douglas Cumming, 2006. "The legislative road to Silicon Valley," Oxford Economic Papers, Oxford University Press, vol. 58(4), pages 596-635, October.
    9. James A. Brander & Edward Egan & Thomas F. Hellmann, 2010. "Government Sponsored versus Private Venture Capital: Canadian Evidence," NBER Chapters, in: International Differences in Entrepreneurship, pages 275-320, National Bureau of Economic Research, Inc.
    10. Sophie Manigart & Andy Lockett & Miguel Meuleman & Mike Wright & Hans Landström & Hans Bruining & Philippe Desbrières & Ulrich Hommel, 2006. "Venture Capitalists’ Decision to Syndicate," Entrepreneurship Theory and Practice, , vol. 30(2), pages 131-153, March.
    11. Annaleena Parhankangas & Hans Landström & D. Gordon Smith, 2005. "Experience, contractual covenants and venture capitalists' responses to unmet expectations," Venture Capital, Taylor & Francis Journals, vol. 7(4), pages 297-318, March.
    12. Douglas Cumming, 2005. "Review Essay: Global Venture Capital Transactions," Venture Capital, Taylor & Francis Journals, vol. 7(2), pages 185-201, January.
    13. Thomas Hall, 2015. "Firm Boundaries and Innovation: Empirical Evidence from Entrepreneurial Finance," International Journal of Innovation and Technology Management (IJITM), World Scientific Publishing Co. Pte. Ltd., vol. 12(05), pages 1-33.
    14. Dessi, Roberta, 2011. "Innovation, Spillovers and Venture Capital Contracts," IDEI Working Papers 684, Institut d'Économie Industrielle (IDEI), Toulouse, revised Dec 2013.
    15. Bottazzi, Laura & Da Rin, Marco & Hellmann, Thomas, 2008. "Who are the active investors?: Evidence from venture capital," Journal of Financial Economics, Elsevier, vol. 89(3), pages 488-512, September.
    16. Carsten Bienz & Julia Hirsch, 2011. "The Dynamics of Venture Capital Contracts," Review of Finance, European Finance Association, vol. 16(1), pages 157-195.
    17. Tykvová, Tereza & Schertler, Andrea, 2014. "Does Syndication With Local Venture Capitalists Moderate the Effects of Geographical and Institutional Distance?," Journal of International Management, Elsevier, vol. 20(4), pages 406-420.
    18. S. Manigart & A. Lockett & M. Meuleman & M. Wright & H. Landström & H. Bruining & P. Desbrières & U. Hommel, 2004. "Why Do Venture Capital Companies Syndicate?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/226, Ghent University, Faculty of Economics and Business Administration.
    19. Vladimir Atanasov & Thomas Hall & Vladimir Ivanov & Katherine Litvak, 2019. "The Impact of Public Pension Funds and Other Limited Partners on the Governance of Venture Capital Funds," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(01), pages 1-28, March.
    20. Mico Apostolov, 2011. "Governance and Enterprise Restructuring: The Case of Macedonia," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 18(2), pages 299-309, December.
    21. Schertler, Andrea & Tykvová, Tereza, 2006. "Rivals or partners? Evidence from Europe's international private equity deals," ZEW Discussion Papers 06-091, ZEW - Leibniz Centre for European Economic Research.
    22. Santillán-Salgado, Roberto J. & Hernández-Perales, Norma A., 2011. "Generalidades sobre los Fondos de Capital Privado y de Capital Emprendedor: una visión actualizada de la industria y de su entorno en México [Generalities on Private Equity and Venture Capital Fund," MPRA Paper 27815, University Library of Munich, Germany.
    23. Salim Chahine & Igor Filatotchev & Mike Wright, 2007. "Venture Capitalists, Business Angels, and Performance of Entrepreneurial IPOs in the UK and France," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(3-4), pages 505-528.
    24. Alessandro Rosiello & Gil Avnimelech & Morris Teubal, 2011. "Towards a systemic and evolutionary framework for venture capital policy," Journal of Evolutionary Economics, Springer, vol. 21(1), pages 167-189, February.
    25. Thomas Ahrens & Igor Filatotchev & Steen Thomsen, 2011. "The research frontier in corporate governance," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 15(3), pages 311-325, August.

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    More about this item

    Keywords

    Venture capital; Financial contracting; Law and finance; Corporate governance;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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