Legality and Venture Capital Exits
38 Pages Posted: 28 Oct 2002 Last revised: 10 Sep 2008
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Legality and Venture Capital Exits
Legality and Venture Capital Exits
Legality and Venture Capital Exits
Abstract
This paper introduces an analysis of the impact of Legality on the exiting of venture capital investments. We consider a sample of 468 venture-backed companies from 12 Asia-Pacific countries, and these countries' venture capitalists' investments in US-based entrepreneurial firms. The data indicate IPOs are more likely in countries with a higher Legality index. This core result is robust to controls for country-specific stock market capitalization, MSCI market conditions, venture capitalist fund manager skill and fund characteristics, and entrepreneurial firm and transaction characteristics. Although Black and Gilson (1998) speculate on a central connection between active stock markets and active venture capital markets, our data in fact indicate the quality of a country's legal system is much more directly connected to facilitating VC-backed IPO exits than the size of a country's stock market. The data indicate Legality is a central mechanism which mitigates agency problems between outside shareholders and entrepreneurs, thereby fostering the mutual development of IPO markets and venture capital markets.
Keywords: Venture Capital, Exits, IPO, Acquisition, Law and Finance
JEL Classification: G24, G28, G31, G32, G35
Suggested Citation: Suggested Citation
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