Stay at Home or Go Abroad? The Impact of Fiscal and Legal Environments on the Geography of Private Equity Flows

Using a unique European country dataset from 2000-2006, this paper analyzes how fiscal and legal environments impact the geography of private equity investments. We expect that an improvement in the intermediaries’ fiscal environment will cause a shift in the supply curve. This shift will increase domestic investments, generate a positive return differential between foreign and domestic investments, and thus encourage private equity investors to go abroad. Our results confirm these predictions and suggest that investors systematically exploit cross-country differences in fiscal environments. As to the legal environment, we expect an improvement to shift both the domestic supply and the demand curve. These shifts will increase domestic investments, and depending on their relative magnitude, may generate either a positive or a negative return differential. Our results indicate that countries with a favorable legal environment have a higher level of domestic investment and also attract a higher amount of private equity from abroad.