How Do Legal Differences and Learning Affect Financial Contracts?

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. G24: Investment banking; Venture Capital; Brokerage G32: Financing policy; Capital and ownership structure * University of Chicago Graduate School of Business and **University of Lausanne IMD and UBS Global Asset Management. This research has been supported by the Kauffman Foundation, by the Lynde and Harry Bradley Foundation and the Olin Foundation through grants to the Center for the Study of the Economy and the State, and by the Center For Research in Security Prices. Ola Bengtsson, Alejandro Hajdenberg, Jonas Lindström, and Dali Ma provided excellent research assistance. We are grateful to the venture capital partnerships for providing data. We have received useful comments from Ulf Axelson, Jim Brander, Ron Giammarino, Luigi Guiso, Yael Hochberg, Anil Kashyap, Josh Lerner, Jay Ritter, Antoinette Schoar, Franco Wong, Lucy White, Luigi Zingales and seminar participants at the Bundesbank, Duke, the Federal Reserve Board of Governors, Harvard, Kauffman Foundation, MIT, NYU, the SIFR Conference on Venture Capital, SUNY Binghamton, the University of British Columbia, and the University of Chicago GSB and Law School. Contact information: Steven Kaplan, Per Strömberg: University of Chicago Graduate School of Business, 1101 East 58th Street, Chicago, IL 60637; e-mail: [email protected], [email protected]. Frederic Martel: UBS Global Asset Management, Gessnerallee 3-5, CH-8005 Zurich; IMD; and University of Lausanne; e-mail: [email protected].