What Role of Legal Systems in Financial Intermediation? Theory and Evidence
نویسندگان
چکیده
How does the relationship between an investor and entrepreneur depend on the legal system? In a double moral hazard framework, we show how optimal contracts, corporate governance, and investor actions depend on the legal system. With better legal protection, investors give more non-contractible support, demand more downside protection, and exercise more governance. Moreover, investors in better legal systems have stronger incentives to develop the competencies necessary to provide governance and value-adding support. When investing in a different legal systems they bring their competencies with them and behave differently than local investors. We test these predictions using a hand-collected dataset of European venture capital deals. The empirical results confirm the model predictions. PRELIMINARY, PLEASE DO NOT QUOTE ∗We are grateful to all the venture capital firms which provided us with data. We received valuable comments from Reneé Adams, Giacinta Cestone, Vicente Cuñat, Michele Pellizzari, and Alessandro Sembenelli, and from seminar participants at CSEF (Salerno), IDEI (Toulouse), Lugano, Pompeu Fabra, Tilburg, UBC (Vancouver), and at the Second RICAFE Conference (Frankfurt, 2004). We thank Roberto Bonfatti, Matteo Ercole, and Francesca Revelli for long hours of dedicated research assistance. Our colleague Pietro Terna made the online data collection possible. Financial support from the European Investment Fund and the European Commission (grant HPSE-CT-2002-00140) is gratefully acknowledged. All errors remain our own.
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