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Abstract:
This paper considers the issue of when venture capitalists (VCs) make a partial, as opposed to a full exit, for the full range of exit vehicles. A full exit for an IPO involves a sale of all of the venture capitalist's holdings within one year of the IPO; a partial exit involves sale of only part of the venture capitalist's holdings within that period. A full acquisition exit involves the sale of the entire firm for cash; in a partial acquisition exit, the venture capitalist receives (often illiquid) shares in the acquiror firm instead of cash. In the case of a buyback exit (in which the entrepreneur buys out the venture capitalist) or a secondary sale, a partial exit entails a sale of only part of the venture capitalist's holdings. A partial write-off involves a write down of the investment. We consider the determinants of full and partial venture capital exits for all five exit vehicles. We also perform a number of comparative empirical tests on samples of full and partial exits derived from a survey of Canadian and U.S. venture capital firms. The data offer support to the central hypothesis of the paper: that the greater the degree of information asymmetry between the selling VC and the buyer, the greater the likelihood of a partial exit to signal quality. The data also indicate differences between the U.S. and Canadian venture capital industries, and highlight the impact of legal and institutional factors on exit strategies across countries.

Abstract:
This paper considers the issue of when venture capitalists (VCs) make a partial, as opposed to a full exit, for the full range of exit vehicles. A full exit for an IPO involves a sale of all of the venture capitalist's holdings within one year of the IPO; a partial exit involves sale of only part of the venture capitalist's holdings within that period. A full acquisition exit involves the sale of the entire firm for cash; in a partial acquisition exit, the venture capitalist receives (often illiquid) shares in the acquiror firm instead of cash. In the case of a buyback exit (in which the entrepreneur buys out the venture capitalist) or a secondary sale, a partial exit entails a sale of only part of the venture capitalist's holdings. A partial write-off involves a write down of the investment. We consider the determinants of full and partial venture capital exits for all five exit vehicles. We also perform a number of comparative empirical tests on samples of full and partial exits derived from a survey of Canadian and U.S. venture capital firms. The data offer support to the central hypothesis of the paper: that the greater the degree of information asymmetry between the selling VC and the buyer, the greater the likelihood of a partial exit to signal quality. The data also indicate differences between the U.S. and Canadian venture capital industries, and highlight the impact of legal and institutional factors on exit strategies across countries.

Parts of this paper appear in an earlier and different version entitled The Extent of Venture Capital Exits: Evidence from Canada and the United States, forthcoming in a book pursuant to a conference at Tilburg University and edited by J. McCahery and L.D.R. Renneboog (Oxford University Press).

Venture capital, Exit strategy, Regulation

Abstract:
Venture capitalists in all non-U.S. countries around the world have consistently reported the use of a variety of securities, including common equity, preferred equity, convertible preferred equity, debt, convertible debt, and combinations (in the U.S., venture capitalists typically use convertible preferred equity, and there is a tax bias in favour of that instrument in the U.S.). The types of entrepreneurial firms that receive venture finance may be defined by a variety of characteristics, such as stage of development, type of industry, and capital requirements. Given this broad context observed in practice, previous research has not considered the extent to which different securities, among the complete class of forms of finance, attract different types of entrepreneurial firms. In this paper we investigate the empirical tractability of the adverse selection risks associated with capital structure from 4114 first-round Canadian venture capital investments. We first characterize of the nature of uncertainty (in terms of the risk of financing a "lemon" or a "nut") facing investors for different types of entrepreneurial firms. We then show that venture capitalist syndication significantly mitigates problems of adverse selection.

Capital structure, adverse selection, venture capital, syndication

Abstract:
Recent non-U.S. venture capitalist datasets around the world have consistently reported the use of a variety of instruments by venture capital funds around the world, including common equity, preferred equity, convertible preferred equity, debt, convertible debt, and combinations (in the U.S., venture capitalists typically use convertible preferred equity, and there is a tax bias in favour of that instrument in the U.S.). The types of entrepreneurial firms that receive venture finance may be defined by a variety of characteristics, such as stage of development, type of industry, and capital requirements. Given this broad context observed in practice, previous research has not considered the extent to which different securities, among the complete class of forms of finance, attract different types of entrepreneurial firms. In this paper we investigate the empirical tractability of the adverse selection risks associated with capital structure from 4114 Canadian venture capital investments. We characterize of the nature of uncertainty (in terms of the risk of financing a lemon or a nut) facing investors for different types of entrepreneurial firms. We show that venture capitalist syndication significantly mitigates problems of adverse selection.

Financial contracting, capital structure, adverse selection, entrepreneurship, venture capital

Abstract:
Using a sample of European venture capital (VC) investments, I study the relation between VC contracts and exits. The data indicate that ex ante, stronger VC control rights increase the likelihood that an entrepreneurial firm will exit by an acquisition, rather than through a write-off or an IPO. My findings are robust to controls for a variety of factors, including endogeneity and cases in which the VC preplans the exit at the time of contract choice. My findings are consistent with control-based theories of financial contracting, such as Aghion and Bolton ().

G24, G32, G33, G34

Abstract:
Using a sample of European venture capital investments, I study the relation between venture capital (VC) contracts and exits. The data indicate that ex ante, stronger VC control rights increase the likelihood that an entrepreneurial firm will exit by an acquisition, rather than through a write-off or an IPO. My findings are robust to controls for a variety of factors, including endogeneity and cases in which the VC preplans the exit at the time of time of contract choice. My findings are consistent with control-based theories of financial contracting, such as Aghion and Bolton (1992).

Venture Capital, Financial Contracting, Exit, IPO, Acquisition

Abstract:
To obtain more funds from the institutional investors, private equity fund managers may report inflated valuations of private investee companies that are not yet sold. However, such overvaluations may result in a reputational cost when those investments are realized. Using evidence from 39 countries, we show that significant systematic biases exist in the reporting of fund performance, and that these biases depend on the degree of accounting conservatism and the strength of the legal environment in a country, and on proxies for the degree of information asymmetry between institutional investors and private equity fund managers.

Information Disclosure, Private Equity, Risk, Return, Law and Finance

Abstract:
Prior research has argued that convertible preferred equity is the optimal form of venture capital finance, based on datasets with up to 213 observations from the U.S., where unique tax biases exist in favour of convertible preferred. This paper introduces a comparable sample of 3083 Canadian corporate and limited partnership venture financing transactions spanning the years 1991-2000. The data indicate a variety of securities are used, and convertible preferred equity has not been the most frequent. Empirical tests offer strong support for the proposition that the mix of financing instruments minimizes the costs arising from a set of agency problems.

Venture Capital, Capital Structure, Financial Contracting

Abstract:
Prior research has argued that convertible preferred equity is the optimal form of venture capital finance, based on datasets with up to 213 observations from the U.S., where unique tax biases exist in favour of convertible preferred. This paper introduces a comparable sample of 3083 Canadian corporate and limited partnership venture financing transactions spanning the years 1991-2000. The data indicate a variety of securities are used, and convertible preferred equity has not been the most frequent. Empirical tests offer strong support for the proposition that the mix of financing instruments minimizes the costs arising from a set of agency problems.

Venture capital, capital structure, financial contracting

Abstract:
This paper explores factors that affect portfolio sizeamong a sample of venture capital financing data from 214 Canadian funds. Fourcategories of factors affect portfolio size: (1) the venture capital funds'characteristics, including the type of fund, fund duration, fund-raising, andthe number of venture capital fund managers; (2) the entrepreneurial firms'characteristics, including stage of development, technology, and geographiclocation; (3) the nature of the financing transactions, including staging,syndication, and capital structure; and (4) market conditions. The data furtherindicate decreasing returns to scale in the number of entrepreneurial firmsfinanced by a venture capital fund. (Publication abstract)

Business conditions, Business assistance programs, Private financing, Corporate ventures, Venture capital, Firm financing, Venture capital portfolios, Firm characteristics

Abstract:
This paper explores factors that affect portfolio size among a sample of venture capital financing data from 214 Canadian funds. Four categories of factors affect portfolio size: (1) the venture capital funds' characteristics, including the type of fund, fund duration, fundraising, and the number of venture capital fund managers; (2) the entrepreneurial firms' characteristics, including stage of development, technology, and geographic location; (3) the nature of the financing transactions, including staging, syndication and capital structure; and (4) market conditions. The data further indicate decreasing returns to scale in the number of entrepreneurial firms financed by a venture capital fund.

Venture capital portfolio, returns to scale, entrepreneurship

Abstract:
This paper explores factors that affect portfolio size among a sample of venture capital financing data from 214 Canadian venture capital funds. The data encompass a variety of venture capital funds (private independent limited partnerships, corporate, government, labour-sponsored), and a variety of entrepreneurial firms. In addition to direct measures of investment costs, a number of proxies for the non-pecuniary costs and benefits of having additional entrepreneurial firms in a venture capital portfolio are considered. Four categories of factors affect portfolio size: (1) the venture capital funds' characteristics, including the type of fund, fund duration, fundraising, and the number of venture capital fund managers; (2) the entrepreneurial firms' characteristics, including stage of development, technology, and geographic location; (3) the nature of the financing transactions, including staging, syndication and capital structure; and (4) market conditions. We assess the statistical and economic significance of these variables, and test for the presence of increasing versus decreasing returns to scale in the factors that affect the number of investee entrepreneurial firms in a venture capital portfolio.

Venture Capital Portfolio, Returns to Scale, Entrepreneurship

Abstract:
Venture capital exit vehicles enable, to different degrees, mitigation of informational asymmetries and agency costs between the entrepreneurial venture and the new owners of the firm. Different exit vehicles also affect the amount of new capital for the entrepreneurial firm. Based on these factors, we conjecture the efficient pattern of exits depending on the quality of the entrepreneurial venture, the nature of its assets, and the duration of venture capital investment. We empirically assess the significance of these factors using a multinomial logit model. Our comparative results between Canada and the U.S. provide insight into the impact of different institutional and legal constraints, and suggest such constraints have distorted the efficient pattern of exits in Canada.

Abstract:
This paper provides an overview of the literature on private equity and leveraged buyouts, focusing on global evidence related to both governance and returns to private equity and leveraged buyouts. We distinguish between financial and real returns to this activity, where the latter refers to productivity and broader performance measures. We also outline a research agenda on this topic.

management buyouts, private equity, total factor productivity, financial and real returns, corporate governance

Abstract:
Explores theeffects of a legal system onthe exit from venture capital investments.Data were collected from 468venture-backed companies spanning twelve different Asia-Pacific countries thatoperated in the years between 1989 and 2001.Of these companies, 78exited by an initial public offering (IPO), 200 by private sale, 55 bywrite-off, and the remaining 135 had not exited. The five vehicles for venture capital exit studied are IPOs, acquisitions,secondary sales, buybacks, and write-offs. One finding is thatAsia-Pacific venture capitalists are not able to time markets with respect topublic market conditions --many of the firms did not exit until after thebubble crash in April of 2000.Further, the higher a country's legalityindex, the more likely that ventures are to pursue an IPO. Of particular importance is that none of the results showed that an increasein the likelihood of an IPO was directly associated with the size of acountry's stock market.In fact, this analysis has shown that acountry's legal system is more directly related to IPOs than the stockmarket. (SRD)

Legal systems, Stock markets, Law, Financing, Venture capital, Exit strategies, Initial public offerings (IPO)

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.

Venture capital, exits, IPO, acquisition, law and finance

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.

Venture Capital, Exits, IPO, Acquisition, Law and Finance

Abstract:
This paper empirically analyzes the impact of hedge fund regulation on fund structure and performance. The data indicate restrictions on the location of key service providers and permissible distributions via wrappers are associated with lower fund alphas, lower average monthly returns, and higher fixed fees. Further, restrictions on the location of key service providers are associated with lower manipulation-proof performance measures, while wrapper distributions are associated with lower performance fees. As well, the data show standard deviations of monthly returns are lower among jurisdictions with restrictions on the location of key service providers and higher minimum capitalization requirements.

Hedge Funds, Regulation, Law and Finance

Abstract:
This paper introduces a dataset on forms of finance used in 12,363 Canadian and US venture capital and private equity financings of Canadian entrepreneurial firms from 1991 to 2003. The data comprise different types of venture capital institutions, including corporate, limited partnership, government and labour-sponsored funds, as well as US funds that invest in Canadian entrepreneurial firms. Unlike prior work with US venture capitalists financing US entrepreneurial firms, the data herein indicate convertible preferred equity has never been the most frequently used form of finance for either US or Canadian venture capitalists financing Canadian entrepreneurial firms, regardless of the definition of the term 'venture capital'. A syndication example and a simple theoretical framework are provided to show the non-robustness of prior theoretical work on optimal financial contracts in venture capital finance. Multivariate empirical analyses herein indicate (1) security design is a response to expected agency problems, (2) capital gains taxation affects contracts, (3) there are trends in the use of different contracts which can be interpreted as learning, and (4) market conditions affect contracts.

Venture Capital, Financial Contracts, Regulation

Abstract:
This paper introduces a dataset on forms of finance used in 12,363 Canadian and US venture capital and private equity financings of Canadian entrepreneurial firms from 1991 to 2003. The data comprise different types of venture capital institutions, including corporate, limited partnership, government and labour-sponsored funds, as well as US funds that invest in Canadian entrepreneurial firms. Unlike prior work with US venture capitalists financing US entrepreneurial firms, the data herein indicate convertible preferred equity has never been the most frequently used form of finance for either US or Canadian venture capitalists financing Canadian entrepreneurial firms, regardless of the definition of the term 'venture capital'. A syndication example and a simple theoretical framework are provided to show the non-robustness of prior theoretical work on optimal financial contracts in venture capital finance. Multivariate empirical analyses herein indicate (1) security design is a response to expected agency problems, (2) capital gains taxation affects contracts, (3) there are trends in the use of different contracts which can be interpreted as learning, and (4) market conditions affect contracts.

Venture capital, capital structure, financial contracts, regulation

Abstract:
This paper considers the issue of when venture capitalists (VCs) make a partial, as opposed to a full exit, for the full range of exit vehicles. A full exit for an IPO involves a sale of all of the venture capitalist's holdings within one year of the IPO; a partial exit involves sale of only part of the venture capitalist's holdings within that period. A full acquisition exit involves the sale of the entire firm for cash; in a partial acquisition exit, the venture capitalist receives (often illiquid) shares in the acquiror firm instead of cash. In the case of a secondary sale or a buyback exit (in which the entrepreneur buys out the venture capitalist), a partial exit entails a sale of only part of the venture capitalist's holdings. A partial write-off involves a write down of the investment. We perform empirical tests on samples of full and partial exits derived from a survey of Canadian and U.S. venture capital firms. The evidence indicates that partial exits are more likely for IPOs and secondary sales in Canada. Partial exits in Canada are also more likely the greater the market to book value of the investment. Partial exits in the U.S., by contrast, are more likely for buyback exits and when there is greater capital available for investment in the venture capital industry. The U.S. evidence further indicates that partial acquisition exits are more likely for technology firms, the longer the investment duration, and the greater the market to book value of the entrepreneurial firm. We also present evidence that the longer the investment duration, the more likely that venture capital investments will be written down, rather than completely written off. The differences we find between the Canadian and U.S. samples highlight the impact of legal and institutional factors on exit strategies.

Venture Capital, Exits, IPO, Acquisition, Secondary Sale, Buyback, Write-off

Abstract:
We propose a model that examines the optimal size of venture capital and private equity fund portfolios. The relationship between a VC and entrepreneurs is characterized by double-sided moral hazard, which causes the VC to trade off larger portfolios against lower values of portfolio companies. We analyze the structural relations between the VC's optimal portfolio structure and entrepreneurs' and VC's productivities, their disutilities of effort, the value of a successful project, and the required initial investment in a venture. We also test the model's predictions using a small proprietary dataset collected through a survey targeted to VC and private equity funds worldwide.

Abstract:
Recent initiatives in a number of countries have sought to promote entrepreneurship through relaxing the legal consequences of personal bankruptcy. Whilst there is an intuitive link, relatively little attention has been paid to the question empirically, particularly in the international context. We investigate the relationship between bankruptcy laws and entrepreneurship using data on self-employment over 16 years (1990-2005) and fifteen countries in Europe and North America. We compile new indices reflecting how “forgiving” personal bankruptcy laws are. These measures vary over time and across the countries studied. We show that bankruptcy law has a statistically and economically significant effect on self-employment rates when controlling for GDP growth, MSCI stock returns, and a variety of other legal and economic factors.

K35, M13

Abstract:
Entrepreneurs, catalysts for innovation in the economy, are increasingly the object of policymakers' attention. Recent initiatives both in the UK and at EU level have sought to promote entrepreneurship by reducing the harshness of the consequences of personal bankruptcy law. Whilst there is an intuitive link between the two, relatively little attention has been paid to the question empirically, particularly in the international context. We investigate the link between bankruptcy and entrepreneurship using data on self employment over 16 years (1990-2005) and 15 countries in Europe and North America. We compile new indices reflecting how `forgiving' personal bankruptcy laws are, reflecting the time to discharge. These measures vary over time and across the countries studied. We show that bankruptcy law has a statistically and economically significant effect on self employment rates when controlling for GDP growth, MSCI stock returns, and a variety of other legal and economic factors. The results have clear implications for policymakers.

Personal Bankruptcy Law, Entrepreneurship

Abstract:
This study empirically examines the effects of a regulation change on the structure and governance of leveraged buyouts (LBOs) within the Italian private equity market, whose transactions were only recently legalized. With a new data set covering approximately 85% of the buyout funds active in Italy during the period of 1999–2006, we find that a regulation that prohibits LBOs can reduce their frequency, but does not exclude them altogether. Rather, it inhibits efficient governance and distorts decision making. Overall, the data are consistent with the view that laws prohibiting LBOs result in less efficient LBO arrangements.

Buyouts, Regulation, Governance, Law and finance

Abstract:
This paper empirically examines the effects of LBO regulations on the structure of LBO transactions based on data from Italy from 1999-2006. We show that rendering LBOs illegal prior to 2004 reduced the frequency of LBOs in Italy but did not exclude them altogether. Rather, it inhibited efficient LBO structure by causing private equity managers to focus on evading regulations. During the period of illegality, LBO investors held minority portion of board seats, fewer control rights and smaller equity ownership percentages. Moreover, LBOs were more intensively screened for the fit ('agreeableness') with the target firm management. By contrast, during the period of legality LBOs were more intensively screened for the quality of the business plan in reference to market conditions and the ability to efficiently structure the investment. Overall, the data are consistent with the view that uncertainty regarding the legal validity of LBOs impedes efficient governance and distorts decision making.

Buyouts, Private Equity, Regulation, Governance, Law and Finance

Abstract:
U.S. venture capital financings of U.S. entrepreneurial firms with up to 213 observations is consistent with the proposition that convertible preferred equity is the optimal form of venture capital finance. This paper introduces new evidence from 208 U.S. venture capital financings of Canadian entrepreneurial firms. In contrast to U.S. venture capital investments in U.S. entrepreneurial firms, U.S. venture capitalists finance Canadian entrepreneurial firms with a variety of forms of finance. The differences between domestic and international U.S. venture capitalist financing structures are not attributable to differences in the definition of the term 'venture capital'. The data point to the importance of institutional determinants of venture capitalist capital structures within the U.S. and abroad. Among other things, the data indicate that U.S. venture capitalists often do not choose convertible preferred shares in the absence of tax considerations in favour of that financing vehicle.

Venture Capital, Capital Structure, Financial Contracts, Regulation

Abstract:
Venture Capital Trusts (VCTs) are publicly traded venture capital companies in the UK. Since their inception in 1995, 71 VCTs have been launched, collectively raising more than 1.4 billion pounds (as at November 2002). Investors have tax incentives to contribute capital to VCTs; in exchange, VCTs agree to be governed by statute. In this paper we argue VCT statutory governance mechanisms are less efficient than contractual governance among private venture capital limited partnerships. In support of this view, the available evidence is suggestive that VCTs have underperformed relative to other types of venture capital funds in the UK. Despite this apparent underperformance, in 2002 the British Venture Capital Association (BVCA) lobbied for statutory changes to facilitate VCT fundraising efforts through the expansion of allowable tax-exempt contributions, among other things. The available evidence on VCTs to date, alongside similar evidence from a comparable type of tax-subsidized public venture capital fund in Canada, is suggestive that these changes are not justified. A significant amount of further empirical research on VCTs and related public venture capital schemes in the UK is warranted before legislative changes expanding the scope of VCTs are adopted.

Abstract:
This paper considers the structure, governance and performance of a unique class of mutual funds that receives capital only from individuals, and reinvests this contributed capital in private companies, as opposed to traditional mutual funds that invest in publicly traded companies. We consider the particular class of mutual funds known as Canadian Labour-Sponsored Investment Funds (LSIFs). In contrast to expectations, we show that LSIFs have artificially low betas (the average beta is 0.10), returns that have significantly underperformed industry benchmarks (including risk-free 30-day T-bills), average management expense ratios ("MERs", or management expenses/assets) greater than 4%, and have collectively accumulated $Can10 billion (¿4.3 billion) as at 2005 since their statutory inception in various Canadian jurisdictions in the 1980s and 1990s. We show that these incongruous data are directly attributable to the LSIF statutory governance structure. LSIF legislation mandates episodic valuations that determine share prices, an 8-year investor lock-in period, and onerous constraints on capital reinvestment. LSIFs also afford to their investors tax-generated returns in excess of 100%. The LSIF structure provides generalizable insights into the relation between organizational governance and performance, and the unsuitability of mutual fund structures for private equity investment. We compare and contrast the LSIF governance structure with structures in the UK, US and Australia to draw lessons for the appropriate design of government sponsored venture capital funds.

Mutual Funds, Venture Capital, Government Sponsorship, Risk, Return, Fundraising

Abstract:
Private independent limited partnership venture capital funds receive capital from institutional investors, without tax incentives. Limited partnership investment activities are governed by restrictive covenants that are determined by negotiated contract between the fund managers (general partners) and the institutional investors (limited partners). By contrast, Canadian Labour Sponsored Venture Capital Corporations (LSVCCs) receive capital only from individual investors who receive tax breaks on capital contributions of up to CAN$5,000. LSVCC investment activities are governed by statutory restrictions. This chapter contrasts the governance of LSVCCs to limited partnerships. We also summarize Canadian evidence on the impact of LSVCC governance and tax incentives: (1) on the distribution of venture capital funding between private and LSVCC funds; (2) on the unusually large overhang of uninvested capital in the Canadian venture capital industry; (3) the portfolio size (i.e.
number of investee firms per fund) of private funds versus LSVCCs; and (4) the performance of LSVCCs relative to other types of venture capital organiziations and other comparable investments for individual investors.

Venture Capital, Canada, Tax, Government, Crowding Out, Portfolio Size, Governance

Abstract:
This paper introduces a new dataset from 100 Dutch institutional investors' domestic and international asset private equity allocations. The data indicate that the perceived comparative dearth of regulations of private equity funds impedes institutional investor participation in private equity funds, particularly in relation to the lack of transparency. The data further indicate that the perceived importance of regulatory harmonization of institutional investors has increased Dutch institutional investor allocations to domestic and international private equity funds. The Financieel Toetsingskader (regulation of portfolio management standards such as matching of assets and liabilities) has had the most pronounced and robust effect, followed by Basel II (regulation of risk management and disclosure standards) and the International Financial Reporting Standards (regulation of reporting standards and transparency).

Private Equity, Law and Finance

Abstract:
This paper introduces a new dataset from 100 Dutch institutional investors' domestic and international asset private equity allocations. The data indicate that the perceived comparative dearth of regulations of private equity funds impedes institutional investor participation in private equity funds, particularly in relation to the lack of transparency. The data further indicate that the perceived importance of regulatory harmonization of institutional investors has increased Dutch institutional investor allocations to domestic and international private equity funds. The Financieel Toetsingskader (regulation of portfolio management standards such as matching of assets and liabilities) has had the most pronounced and robust effect, followed by Basel II (regulation of risk management and disclosure standards) and the International Financial Reporting Standards (regulation of reporting standards and transparency).

Private Equity, Venture Capital, Law and Finance

Abstract:
This paper introduces a cross-country law and finance analysis of the regulatory impact on the level of capital flows and the sensitivity of capital flows in response to prior performance (that is, the ‘flow-performance’ relationship) in the hedge fund industry. The data indicate that distribution channels in the form of wrappers (securities that combine different products) mitigate flow-performance sensitivity. Distribution channels via investment managers and fund distribution companies enhance flow-performance sensitivity. Funds registered in countries which have larger minimum capitalization requirements have higher levels of capital flows. Funds registered in countries which restrict the location of key service providers have lower levels of capital flows. Further, offshore fund flows and calendar effects evidenced in the data are consistent with tax factors influencing capital flows. The findings are robust to selection effects for offshore registrants, among other robustness checks.

Flow, Performance, Hedge Funds, Regulation, Law and Finance

Abstract:
This paper introduces a cross-country law and finance analysis of the flow-performance relationship for hedge funds. The data indicate that distribution channels in the form of private placements and wrappers mitigate the impact of performance on fund flows. Distribution channels via investment managers and fund distribution companies enhance the impact of performance on fund flows. Funds registered in countries which have larger minimum capitalization requirements for funds have higher levels of capital flows. Funds registered in countries which restrict the location of key service providers have lower levels of capital flows. Further, offshore fund flows and calendar effects evidenced in the data are consistent with tax factors influencing fund flows. Our findings are robust to Heckman-selection effects for offshore registrants, among other robustness checks.

Flow, Performance, Hedge Funds, Regulation, Law and Finance

Abstract:
Venture capital is still a comparatively young industry. While Gompers and Lerner date the first venture capital firm to 1946, the industry did not really get on its feet until the late 1970s. Nonetheless, the venture capital industry has been through a sufficient number of business cycles that empiricists have mapped out a number of systematic differences in the behavior of venture capitalists (VCs) in boom and bust periods. One aim of this Article is to review this literature with a view to documenting some of these differences. Another is to draw these empirical findings together, indicating how the various strands of the empirical literature paint a remarkably consistent picture of how VCs respond to the changing economic incentives that exist in boom and bust periods. We suggest that these strands can be united by identifying three key parameters that are most responsible for prompting changes in VC behavior as between boom and bust. These are: changes in the availability and valuation of IPO exits, the inelasticity of VC managerial talent in the short run; and the rapidly increasing supply of capital to venture capital funds in boom periods.

We also seek to explore how the changing availability of IPOs, and greatly enhanced IPO valuations produced widespread and systematic pathologies in IPO exits during the Internet bubble (1999-2000) - pathologies that led investment bankers and VCs to change their behavior in value-destructive ways. While the evidence suggests that these pathologies did not start during the bubble, they clearly reached their apogee during that period. If there is a silver lining in all this, it is that the bubble has provided policy makers with a taxonomy of potential abuses and markers that point to the presence of such abuses, particularly extreme underpricing of new offerings. This learning will greatly lower the likelihood that these abuses will be repeated in the future.

We also discuss how a court ought to construe the VC's duties of loyalty and care in a lawsuit either by investors in a limited partnership venture capital fund, or by an investee firm whose interests were poorly served either by opportunistic or negligent VC behavior. In particular, since VC behavior differs from boom to bust, we raise the question of whether a court should look to bust period behavior in constructing a standard of care, or to boom period behavior, or some amalgam of the two. For a variety of reasons, we suggest that courts should primarily have regard to bust period behavior. We review empirical evidence that venture capitalist activities differ depending on economic conditions. We also review empirical evidence that shows venture capital fund managers tend to distort reports to institutional investors and inflate performance figures in bust periods.

Venture Capital Cycle, IPO, Litigation, Internet Bubble

Abstract:
Venture capital is still a comparatively young industry. While Gompers and Lerner date the first venture capital firm to 1946, the industry did not really get on its feet until the late 1970s. Nonetheless, the venture capital industry has been through a sufficient number of business cycles that empiricists have mapped out a number of systematic differences in the behavior of venture capitalists (VCs) in boom and bust periods. One aim of this Article is to review this literature with a view to documenting some of these differences. Another is to draw these empirical findings together, indicating how the various strands of the empirical literature paint a remarkably consistent picture of how VCs respond to the changing economic incentives that exist in boom and bust periods. We suggest that these strands can be united by identifying three key parameters that are most responsible for prompting changes in VC behavior as between boom and bust. These are: changes in the availability and valuation of IPO exits, the inelasticity of VC managerial talent in the short run; and the rapidly increasing supply of capital to venture capital funds in boom periods.

We also seek to explore how the changing availability of IPOs, and greatly enhanced IPO valuations produced widespread and systematic pathologies in IPO exits during the Internet bubble (1999-2000) - pathologies that led investment bankers and VCs to change their behavior in value-destructive ways. While the evidence suggests that these pathologies did not start during the bubble, they clearly reached their apogee during that period. If there is a silver lining in all this, it is that the bubble has provided policy makers with a taxonomy of potential abuses and markers that point to the presence of such abuses, particularly extreme underpricing of new offerings. This learning will greatly lower the likelihood that these abuses will be repeated in the future.

We also discuss how a court ought to construe the VC's duties of loyalty and care in a lawsuit either by investors in a limited partnership venture capital fund, or by an investee firm whose interests were poorly served either by opportunistic or negligent VC behavior. In particular, since VC behavior differs from boom to bust, we raise the question of whether a court should look to bust period behavior in constructing a standard of care, or to boom period behavior, or some amalgam of the two. For a variety of reasons, we suggest that courts should primarily have regard to bust period behavior. We review empirical evidence that venture capitalist activities differ depending on economic conditions. We also review empirical evidence that shows venture capital fund managers tend to distort reports to institutional investors and inflate performance figures in bust periods.

Venture Capital Cycle, IPO, Litigation, Internet Bubble

Abstract:
Must policymakers seeking to replicate the success of Silicon Valley's venture capital market first copy other US institutions, such as deep and liquid stock markets? Or can legislative reforms alone make a significant difference? In this paper, we compare the economic and legal determinants of venture capital investment, fundraising, and exits. We introduce a cross-sectional and time series empirical analysis across 15 countries and 14 years of data spanning an entire business cycle. We show that liberal bankruptcy laws stimulate entrepreneurial demand for venture capital; that government programmes more often hinder than help the development of private equity, and that the legal environment matters as much as the strength of stock markets. Our results imply generalizable lessons for legal reform.

Abstract:
Must policymakers seeking to replicate the success of Silicon Valley's venture capital market first copy other US institutions, such as deep and liquid stock markets? Or can legislative reforms alone make a significant difference? In this paper, we compare the economic and legal determinants of venture capital investment, fundraising and exits. We introduce a cross-sectional and time series empirical analysis across 15 countries and 14 years of data spanning an entire business cycle. We show that liberal bankruptcy laws stimulate entrepreneurial demand for venture capital; that government programmes more often hinder than help the development of private equity, and that the legal environment matters as much as the strength of stock markets. Our results imply generalizable lessons for legal reform.

Venture capital, law and finance, bankruptcy

Abstract:
Must policymakers seeking to replicate the success of Silicon Valley's venture capital market first replicate other US institutions, such as deep and liquid stock markets? Or can legal reforms alone make a significant difference? In this paper, we compare the economic and legal determinants of venture capital investment, fundraising and exits. We introduce a cross-sectional and time series empirical analysis across 15 countries and 13 years of data spanning an entire business cycle. We consider three legal variables. First, we employ an aggregate index of legal and fiscal variables that, unlike those used in previous studies, pertains specifically to venture capital. Secondly, we investigate the role of government subsidy programs designed to jump start venture capital markets. Thirdly, the paper focuses on the role of bankruptcy law, hitherto ignored in the literature. We show that the legal environment matters as much as the strength of stock markets; that government programmes more often hinder than help the development of private equity, and that temperate bankruptcy laws stimulate entrepreneurial demand for venture capital. Our results provide generalizable lessons for legal reform.

venture capital, law and finance, bankruptcy

Abstract:
In this paper, we examine a Canadian tax-driven venture capital vehicle known as the "Labour Sponsored Venture Capital Corporation" (LSVCC). As a theoretical matter, we suggest that the LSVCCs can be expected to have higher agency costs and lower profitability than private venture capital funds. We present data that is consistent with this view. The central question that we analyze, however, is whether the tax advantages conferred on LSVCCs have resulted in LSVCCs "crowding out," or displacing other types of venture capital funds. Empirical analysis of our data (which covers the 1977-2001 period) is highly consistent with crowding out. The data suggest that crowding out has been sufficiently energetic as to lead to a reduction in the aggregate pool of venture capital in Canada, frustrating one of the key governmental goals underlying the LSVCC programs; namely, the expansion of the aggregate pool of capital. In the course of our analysis, we confirm the importance of macroeconomic factors (the performance of the stock market, real interest rates, and changes in real gross domestic product) in affecting the supply of and demand for venture capital. We also generate evidence that is consistent with the proposition that entrepreneurs in the market for venture capital prefer to incorporate their businesses federally, rather than provincially.

Venture capital cycle, Government sponsorship, Tax, Crowding out

Abstract:
In this paper, we examine a Canadian tax-driven vehicle known as the Labour Sponsored Venture Capital Corporation (LSVCC). As a theoretical matter, we suggest that the LSVCCs can be expected to have higher agency costs and lower profitability than private venture capital funds. We present data that are consistent with this view. The central question that we analyze, however, is whether the tax advantages conferred on LSVCCs have resulted in LSVCCs crowding out, or displacing other types of venture capital funds. Empirical analysis of our data (which covers the 1977-2001 period) is highly consistent with crowding out. The data suggest that crowding out has been sufficiently energetic as to lead to a reduction in the aggregate pool of venture capital in Canada, frusterating one of the key governmental goals underlying the LSVCC programs; namely, the expansion of the aggregate pool of capital. In the course of our analysis, we confirm the importance of macroeconomic factors (the performance of the stock market, real interest rates, and changes in real gross domestic product) in affecting the supply of and demand for venture capital. We also generate evidence that is consistent with the proposition that entrepreneurs in the market for venture capital prefer to incorporate their business federally, rather than provincially.

Abstract:
This paper provides theory and evidence in support of the proposition that venture capitalists adjust their investment decisions according to liquidity conditions on IPO exit markets. We refer to technological risk as a choice variable in terms of the characteristics of the entrepreneurial firm in which the venture capitalist invests, and liquidity risk as the current and expected future external exit market conditions. We show that in times of expected illiquidity of exit markets (high liquidity risk), venture capitalists invest proportionately more in new high-tech and early-stage projects (high technology risk) in order to postpone exit requirements. When exit markets are liquid, venture capitalists rush to exit by investing more in later-stage projects. We further provide complementary evidence that shows conditions of low liquidity risk give rise to less syndication. Our theory and supporting empirical results facilitate a unifying theme that links related research on illiquidity in private equity.

Abstract:
We introduce the concept of style drift to private equity investment. We present theory and evidence pertaining to style drifts in terms of a fund manager's stated focus on particular stages of entrepreneurial development. We develop a model that derives conditions under which style drifts are less likely among younger fund managers. We also show ways in which changes in market conditions can affect style drifts, and differences for funds committed to early-stage investments compared to funds committed to late-stage investments. We find some evidence of a positive relation between style drifting and investment performance.

Abstract:
We introduce the concept of style drift to private equity investment. We present theory and evidence pertaining to style drifts in terms of a fund manager's stated focus on particular stages of entrepreneurial development. We develop a model that derives conditions under which style drifts are less likely among younger fund managers. We also show ways in which changes in market conditions can affect style drifts, and differences for funds committed to early-stage investments compared to funds committed to late-stage investments. We find some evidence of a positive relation between style drifting and investment performance.

Private Equity, Venture Capital, Style Drift

Abstract:
This paper studies institutional investor allocations to the socially responsible asset class. We propose two elements influence socially responsible institutional investment in private equity: internal organizational structure, and internationalization. We study socially responsible investments from Dutch institutional investments into private equity funds, and compare socially responsible investment across different asset classes and different types of institutional investors (banks, insurance companies and pension funds). The data indicate socially responsible investment in private equity is 40-50% more common when the decision to implement such an investment plan is centralised with a single Chief Investment Officer. Socially responsible investment in private equity is also more common among institutional investors with a greater international investment focus, and less common among fund-of-fund private equity investments.

Socially Responsible Investment; International Institutional Investment, Private Equity

Abstract:
This paper studies institutional investor allocations to the socially responsible asset class. We propose two elements influence socially responsible institutional investment in private equity: internal organizational structure, and internationalization. We study socially responsible investments from Dutch institutional investments into private equity funds, and compare socially responsible investment across different asset classes and different types of institutional investors (banks, insurance companies and pension funds). The data indicate socially responsible investment in private equity is 40-50% more common when the decision to implement such an investment plan is centralised with a single Chief Investment Officer. Socially responsible investment in private equity is also more common among institutional investors with a greater international investment focus, and less common among fund-of-fund private equity investments.

Socially Responsible Investment, International Institutional Investment, Private Equity

Abstract:
This paper analyses 280 Australian venture capital and private equity funds and their investments in 845 entrepreneurial firms over the period 1982-2005. I focus the analysis on the Innovation Investment Fund (IIF) governmental program, first introduced in 1997. In order to highlight the unique aspects of the IIF, I compare the properties of the Australian IIF program with government venture capital programs in Canada, the UK and the US. The IIF program is unique with a focus on partnering between government-private sector partnerships, as described herein. I analyse the performance of the IIF funds along several dimensions: the propensity to take on risk by investing in early stage and high-tech investments; the propensity to monitor and add value to investees through staging, syndication, and portfolio size per fund manager; and the exit success. For each of these evaluation criteria, I assess the performance of the IIF funds relative to other types of private equity and venture capital funds in Australia. The data analysed show - in both a statistically and economically significant way - that the IIF program has facilitated investment in start-up, early stage and high tech firms as well as the provision of monitoring and value-added advice to investees. Overall, therefore, the data are strongly consistent with the view that the IIF program is fostering the development of the Australian venture capital industry. However, the vast majority of investments have not yet been exited, and the exit performance of IIFs to date has not been statistically different than that of other private funds. Further evaluation of IIF performance and outcomes is warranted when subsequent years of data become available.

Private Equity, Venture Capital, Government, Public Policy, Entrepreneurship

Abstract:
This paper analyses 280 Australian venture capital and private equity funds and their investments in 845 entrepreneurial firms over the period 1982-2005. I focus the analysis on the Innovation Investment Fund (IIF) governmental program, first introduced in 1997. In order to highlight the unique aspects of the IIF, I compare the properties of the Australian IIF program with government venture capital programs in Canada, the UK and the US. The IIF program is unique with a focus on partnering between government-private sector partnerships, as described herein. I analyse the performance of the IIF funds along several dimensions: the propensity to take on risk by investing in early stage and high-tech investments; the propensity to monitor and add value to investees through staging, syndication, and portfolio size per fund manager; and the exit success. For each of these evaluation criteria, I assess the performance of the IIF funds relative to other types of private equity and venture capital funds in Australia. The data analysed show - in both a statistically and economically significant way - that the IIF program has facilitated investment in start-up, early stage and high tech firms as well as the provision of monitoring and value-added advice to investees. Overall, therefore, the data are strongly consistent with the view that the IIF program is fostering the development of the Australian venture capital industry. However, the vast majority of investments have not yet been exited, and the exit performance of IIFs to date has not been statistically different than that of other private funds. Further evaluation of IIF performance and outcomes is warranted when subsequent years of data become available.

Private Equity, Venture Capital, Government Public Policy, Entrepreneurship

Abstract:
This paper provides evidence on market surveillance from stock exchanges and securities commissions from 25 jurisdictions in North, Central and South America, Western and Eastern Europe, Africa and Asia. Stock exchanges as SROs engage in a greater range of single-market surveillance of market manipulation than securities commissions, but the scope of cross-market surveillance activity is very similar among stock exchanges and securities commissions. Cross-market surveillance is more effective with information sharing arrangements, and securities commissions are more likely to engage in information sharing than stock exchanges. The scope of cross-market surveillance is highly positively correlated with trading activity, unlike the scope of single-market surveillance. The data also indicate that as at 2005, there is ample scope for jurisdictions to expand their cross-market surveillance and thereby stimulate investor confidence and trading activity.

Market Manipulation, Surveillance, Microstructure, Law and Finance

Abstract:
We analyze governance with a new dataset on investments of venture capitalists in 3848 portfolio firms in 39 countries from North and South America, Europe and Asia spanning 1971-2003. We provide evidence that cross-country differences in legality, including legal origin and accounting standards, have a significant impact on the governance structure of investments in the VC industry: better laws facilitate faster deal screening and deal origination, a higher probability of syndication and a lower probability of potentially harmful co-investment, and facilitate investor board representation of the investor and the use of securities that do not require periodic cash flows prior to exit. We also show country-specific differences exist apart from legal and economic development.

Venture Capital, Corporate Governance, Syndication, Entrepreneurial Finance

Abstract:
This paper introduces a cross-country law and finance analysis of the misreporting of returns in the hedge fund industry. We find strong evidence that differences in hedge fund regulation significantly affects the propensity of fund managers to misreport monthly returns. Returns are less likely to be misreported among jurisdictions that permit distributions via investment managers, which reflects active external monitoring of reported returns. By contrast, monthly returns are more likely to be misreported among jurisdictions which permit distribution channels via wrappers, banks and private placements, as well as among jurisdictions which have higher minimum capitalization requirements, and jurisdictions that restrict the location of key service providers. Further, the data indicate fund managers that operate more than one fund are more likely to misreport returns. The findings are robust to selection effects and various other robustness checks. We show misreporting significantly affects capital allocation, and calculate the wealth transfer effects of misreporting and relate this wealth transfer to differences in hedge fund regulation.

Hedge Funds, Regulation, Misreported Returns, Law and Finance

Abstract:
This paper provides empirical insights into the role of contracts and legal systems for managing investor-investee relationships along two dimensions: providing advice and addressing conflict. We examine a new detailed dataset from European venture capital (VC) funds. We match very specific contractual terms in VC contracts with the effort (total time spent) and advice that VCs provide to their entrepreneurial investee firms. We also analyze VC-entrepreneur conflicts. We compare the importance of contractual versus non-contractual governance mechanisms, as well as the role of legal systems in different countries for facilitating VC-entrepreneur relationships. The data indicate VC cash flow and control rights significantly facilitate effort and advice that VCs provide to entrepreneurs. VC-entrepreneur conflicts are closely tied to the quality of laws in which the entrepreneur resides: higher quality legal systems mitigate VC-entrepreneur conflicts. The data further indicate non-contractual governance mechanisms significantly facilitate VC advice and mitigate VC-entrepreneur conflicts. The results provide a unique unifying look into the role of actual VC contracts and legal settings versus other non-contractual governance mechanisms, risk and success potential on VC-entrepreneur relationships in an international context.

Venture Capital, Monitoring, Advice

Abstract:
This paper is the first to introduce an analysis of the effect of different types of venture capitalist value-added activities (financial, administrative, marketing strategic/management) on fundraising. In addition, we include an analysis of the functional difference between committed funds and drawdowns from capital commitments vis-a-vis pension funds and venture capital funds. The new comprehensive data, collected by the Australian Bureau of Statistics for 1999-2001, enable controls for venture capitalist performance, risk, investment activity, and management and performance fees. The results indicate that significantly more capital is allocated to venture capitalists that provide financial and strategic/management expertise to entrepreneurial firms (as opposed to marketing and administrative expertise). In addition, fundraising is greater among funds with higher returns and performance fees and lower fixed management fees. In contrast, drawdowns from capital commitments are greater among venture capital funds that provide financial and marketing expertise to investees (as opposed to strategic and administrative expertise), and among funds with higher performance fees and fixed management fees. Further, the results indicate an adverse impact on venture capital fundraising from illiquidity attributable to a two-year lock-up period in IPO exits over the period considered.

Venture Capital, Fundraising, Drawdowns, Value Added Activities, Returns, Compensation

Abstract:
This paper investigates factors that affect rejection rates in applications for outside finance among different types of investors (banks, venture capital funds, leasing firms, factoring firms, trade customers and suppliers, partners and working shareholders, private individuals and other sources), taking into account the non-randomness in a firm's decision to seek outside finance. The data support the traditional pecking order theory. Further, the data indicate that firms seeking capital are typically able to secure their requisite financing from at least one of the different available sources. However, external finance is often not available in the form that a firm would like.

Entrepreneurial Finance, Capital Gaps, Pecking Order, Adverse Selection

Abstract:
We analyze the economic consequences of disclosure and auditing in a context of large information asymmetry and lenient regulation. In Canada, firms can enter the stock market at a pre-revenue stage, using full disclosure (initial public offerings) or minimal disclosure allowed by reverse mergers. Controlling for several dimensions including self selection, we evidence that the level of divulgation significantly influences the value and the long-run performance of newly listed firms. The choice of a prestigious auditor has significant consequences when the firm opts for full disclosure in initial public offerings, but no impact in reverse mergers.

Disclosure, Auditor, Initial Public Offerings, Reverse Mergers, Listing Standards

Abstract:
This paper examines how the provision of venture capital to small and medium sized businesses (SMEs) is influenced by the ownership structure of the venture capital provider. We introduce a new and unique dataset from the Japanese venture capital market, comprising data on investment and venture capital activities of 127 Japanese venture capital funds. The data allows us to provide a direct comparison of the behaviour of individual owner-manager venture capitalists versus financial intermediation (e.g. bank's venture capital divisions). The data indicate owner-manager venture capitalists (financial disintermediation) give rise to much smaller portfolios of SMEs and more advice to entrepreneurs. Across the scope of different financial intermediation structures including banks, life insurance companies, securities firms, corporations and government bodies, there are further differences in the provision of governance and value-added advice provided to SMEs. Also, the data indicate US-affiliated funds in Japan are more likely to have smaller portfolios and tend to provide more advice to SMEs.

Financial Intermediation, Ownership Structure, Private Equity

Abstract:
Hedge funds have been the subject of media attention in the United States (US) and around the world given the pronounced growth of the hedge fund sector in recent years and the comparative dearth of regulations faced by hedge fund managers. The first part of this paper provides an overview of the potential agency problems associated with managing a hedge fund, and associated rationales for hedge fund regulation. While hedge funds are hardly regulated in the US, there are nevertheless jurisdictions outside the US with different and sometimes more onerous sets of regulatory requirements. Examples of international differences in hedge fund regulation include minimum capitalization requirements, restrictions on the location of key service providers and different permissible distribution channels via private placements, banks, other regulated or non-regulated financial intermediaries, wrappers, investment managers and fund distribution companies.

The second part of this paper provides an analysis of hedge fund strategies in the context of international differences in hedge fund regulation. Certain fund strategies have been characterized in the law and finance literature, as well we in popular media and public policy debates, as being inherently more risky and associated with more pronounced agency problems. For instance, managed futures, long/short and event driven strategies might be associated with greater risk and agency problems than market neutral equity strategies and various arbitrage strategies. At issue, therefore, is whether funds engage in forum shopping to select jurisdictions that potentially offer greater scope for agency problems associated with hedge fund management.

The data examined offer little or no support for the view that hedge fund managers pursuing riskier strategies or strategies with potentially more pronounced agency problems systematically select jurisdictions with less stringent regulations. For the most part, fund strategies are not systematically and statistically related to different regulations observed in different jurisdictions. In fact, to the extent that there is evidence of forum shopping, it is such that funds pursuing riskier strategies or strategies with greater potential agency problems select jurisdictions with more stringent regulations. We may infer from the evidence that forum shopping by fund managers in relation to fund strategic focus is not consistent with a 'race to the bottom'. Rather, hedge fund managers appear to select jurisdictions that are in funds' investors' interests in order to facilitate capital raising by the hedge fund.

Hedge Funds, Forum Shopping, Regulation, Law and Finance

Abstract:
A significant amount of work has been done on corporate law choice and firm value (in terms of share prices, Tobin's Q, or variants), particularly in recent years. These empirical studies of the effect of corporate law on firm value have invariably used econometric methods that treat the decision to reincorporate as a random event. Recent research from the US and abroad has recently shown that this decision is far from random. It is quite possible that the magnitude, sign, and statistical significance of the effect of reincorporation on firm value are quite different when the selection effects are considered. Using a prior dataset that enables selection effects to be considered, we show that the accounting for selection effects using Heckman (1976, 1979) corrections is both economically and statistically significant in ascertaining the impact of corporate law on firm value.

Reincorporation, Corporate law, Firm value, Selection model

Abstract:
A significant amount of work has been done on corporate law choice and firm value (in terms of share prices, Tobin's Q, or variants), particularly in recent years. These empirical studies of the effect of corporate law on firm value have invariably used econometric methods that treat the decision to incorporate as a random event. Recent research from the U.S. and abroad has recently shown that this decision is far from random. It is quite possible that the magnitude, sign, and statistical significance of the effect of reincorporation on firm value are quite different when the selection effects are considered. Using a prior dataset that enables selection effects to be considered, I show that the accounting for selection effects using Heckman (1976, 1979) corrections is both economically and statistically significant in ascertaining the impact of corporate law on firm value.

Reincorporation, Corporate Law, Firm Value, Heckman Selection Model

Abstract:
This paper introduces a new dataset from 50 private investment funds from 17 countries around the world. We analyse the frequency of use of investment covenants imposed by institutional investors governing the activities of private investment fund managers in areas pertaining to investment decisions, investment powers, types of investments, fund operations, and limitations on liability. While the data indicate a role for country legality in affecting the frequency of use of fund covenants, the data further indicate that the presence of legally trained managers has a more pronounced role in affecting the use of covenants. As private equity and venture capital investment increases across Europe and elsewhere, our results indicate that legal practice factors will matter more than the legal setting for the establishment of covenants governing new funds.

Empirical Contracts, Private Equity, Law and Finance

Abstract:
This paper introduces an analysis of international relocation decisions of venture capital (VC)-backed companies. Relocations to the United States are motivated by economic conditions as well as an improvement in the laws of the country in which the entrepreneurial firm is based. Relocations to the United States yield much greater returns to Asia-Pacific VCs than investing in companies already based in the United States at the time of VC investment. Further, more experienced Asia-Pacific VCs have greater success with their investee relocations to the United States, and these relocations yield higher returns relative to staying in their country of origin.

Abstract:
This paper introduces an analysis of international relocation decisions of venture capital (VC) - backed companies. Relocations to the US are motivated by economic conditions as well as an improvement in the laws of the country in which the entrepreneurial firm is based. Relocations to the US yield much greater returns to Asia-Pacific VCs than investing in companies already based in the US at the time of VC investment. Further, more experienced Asia-Pacific VCs have greater success with their investee relocations to the US, and these relocations yield higher returns relative to staying in their country of origin.

International Venture Capital, Entrepreneurship, International Corporate Relocation

Abstract:
This paper examines local bias in the context of venture capital (VC) investments. Based on a sample of US VC investments between 1980 and June 2009, we find more reputable VCs (older, larger, more experienced, and with stronger IPO track record) and VCs with broader networks exhibit less local bias. Staging and specialization in technology industries increase VCs’ local bias. We also find that the VC exhibits stronger local bias when it acts as the lead VC and when it is investing alone. Finally, we show that distance matters for the eventual performance of VC investments.

home bias, venture capital

Abstract:
This paper examines local bias in the context of venture capital (VC) investments. Based on a sample of US VC investments between 1980 and June 2009, we find more reputable VCs (older, larger, more experienced, and with stronger IPO track record) and VCs with broader networks exhibit less local bias. Staging and preference for technology ventures increases VCs’ local bias. We also find that the VC exhibits stronger local bias when it acts as the lead VC and when it is investing alone. Finally, we show that distance matters for the eventual performance of VC investments.

Home bias, private equity

Abstract:
This paper analyses a Pre-Seed Fund ("PSF") government venture capital ("VC") program for the purpose of improving our understanding about effective public policy towards entrepreneurial finance. The PSF program is a public-private partnership started in 2002 for the purpose of fostering more investment in nascent high-tech entrepreneurial companies in Australia. Data from Venture Economics indicate PSFs are the primary provider of seed stage VC in Australia, but PSFs are not more likely to invest in high-tech companies than other types of VC funds. PSFs have smaller portfolios (number of investees) per manager than other types of VC funds, and are more likely to invest in companies resident in the same state, but do not stage and syndicate more frequently than other types of VC funds. Overall, therefore, the structure of the program has given rise to mixed performance in terms of finance and governance provided to nascent high-tech entrepreneurial companies. As well, there is also suggestive evidence that the PSF program diminishes the incentives for Innovation Investment Funds (a previously existing Australian government VC fund program) to invest in seed stage ventures, and hence competing government initiatives appear to be crowding out one another. Further evidence suggests that among the four PSFs in existence, one PSF has outperformed the other PSFs in regards to the investee company patents and financial statement performance, even though this fund has invested less money and charged lower management fees than its counterparts. Hence, a further lesson from the PSF program is that the impact of government sponsored VC funds depends not only on the design of the program but also on the selection of the VC managers carrying out the investments.

Venture Capital, Government, Public Policy, Entrepreneurship

Abstract:
This paper examines the effect of fund size on investee firm valuations in the venture capital market. We show a convex relationship between fund size and firm valuations. We further document firm valuations are positively correlated to measures of limited attention such as fund size per partner and excess fund size per partner. In addition, we show ventures offered higher valuations do not reward their investors with higher exit returns. Our findings hold across a wide range of robustness checks, including but not limited to sample selection and correction for unobserved company-level value drivers. Our findings support the notion that there is diseconomy of scale in the venture capital industry, which is partially due to the constraints from the quality and quantity of human capital when fund size grows.

Limited Attention, Venture Capital, Fund Size, Equity Valuation

Abstract:
This paper studies the effect of the introduction of government provided Internet technology to rural communities on regional entrepreneurship. Entrepreneurship increases among larger Internet communities, as the Internet spurs entrepreneurial activities by enabling agglomeration across areas that have a pre-existing cluster of real entrepreneurial activities. However, there is a decrease in entrepreneurship among smaller and more geographically remote Internet communities, as the Internet facilitates the consumption of items and services not produced within such smaller local communities. Overall, virtual entrepreneurial clusters are not independent of real entrepreneurial clusters.

Internet, Investment, Regional Development, Government Program

Abstract:
Private equity ("PE") firms are financial intermediaries standing between the portfolio firms and their investors. They are typically organized as closed-end funds aiming to overcome informational asymmetries and to exploit specialization gains in selecting and overseeing portfolio firms. However, their existence as financial intermediaries creates new informational asymmetries (with respect to the investors in the PE funds). Fund managers raise follow-on funds before exiting their investments, and may have incentives to overvalue their as-yet-unsold investments when making disclosures to institutional investors. Despite strong incentives to overvalue, PE funds do not face mandatory disclosure rules in any country with a significant PE industry. Yet the overvaluation of unexited PE investments has the potential to distort capital allocations to the PE industry generally, and across PE funds in different countries around the world. Disclosure of performance to the investor is burdened by two main difficulties. On the one hand, valuation requires sufficient information on the performance of the firm whereas on the other hand, even if sufficient information is available, PE firms may disclose information strategically. The main aim of this Article is to discuss these two issues in detail.

Private Equity, Valuation, Disclosure, Returns, Regulation, Law and Finance

Abstract:
This paper identifies a strong tendency for Canadian private equity investors to finance entrepreneurs that reside in the same province. For all types of investors and entrepreneurial firms, in terms of the number of investments (13,729 transactions), 84.42% of investments were intra-provincial. In terms of the total value of these transactions ($20,193,896,909 in 1997 dollars), 61.15% of the investment value was intra-provincial. We provide evidence that both agency costs and information asymmetries systematically give rise to differences in the frequency of inter- versus intra-provincial investments, and compare the importance of agency versus institutional factors leading to home bias.

home bias, private equity

Abstract:
This paper identifies a strong tendency for Canadian private equity investors to finance entrepreneurs that reside in the same province. For all types of investors and entrepreneurial firms, in terms of the numbers of investments (13,729 transactions), 84.42% of investments were intra-provincial. In terms of the total value of these transactions ($20,193,896,909 in 1997 dollars), 61.15% of the investment value was intra-provincial. We provide evidence that certain economic and institutional factors systematically give rise to differences in the frequency of inter- versus intra-provincial investments. We interpret the evidence in relation to the appropriateness of Canada's fragmented provincial securities regulatory structure.

Venture capital, private equity, home bias

Abstract:
In a study of the incorporation market, Cumming and MacIntosh (2000) argued on the basis of theory and empirical evidence that interjurisdictional competition has not played a significant role in shaping corporate law in Canada. Nevertheless, they did find partial demand-side econometric evidence of jurisdiction shopping on the basis of incorporation fees and the corporate law reforms in a few Canadian jurisdictions. The purpose of this article is to address two additional demand-side issues pertaining to firms that have reincorporated (i.e., changed jurisdiction of incorporation at least once during their lifetime) in Canada. First, the rationales underlying firms' decisions to reincorporate from one jurisdiction to another are examined. To this end, we analyze the results of a survey sent to firms listed on a Canadian stock exchange that reincorporated after 1975. Second, the issue of whether jurisdiction shopping affects firm value is empirically assessed by means of an event study. Our results indicate that (1) inter-provincial reincorporations tend to be prompted by the transaction costs of carrying on a business, (2) federal reincorporations have a more substantive law-shopping component, and (3) certain reincorporation transactions statistically enhance firm value, but others diminish value.

Reincorporation, Corporate Law, Event Study, Canada

Abstract:
In a study of the incorporation market, Cumming and MacIntosh (2000) argued on the basis of theory and empirical evidence that interjurisdictional competition has not played a significant role in shaping corporate law in Canada. Nevertheless, they did find partial demand-side econometric evidence of jurisdiction shopping on the basis of incorporation fees and the corporate law reforms in a few Canadian jurisdictions. The purpose of this article is to address two additional demand-side issues pertaining to firms that have reincorporated (i.e., changed jurisdiction of incorporation at least once during their lifetime) in Canada. First, the rationales underlying firms' decisions to reincorporate from one jurisdiction to another are examined. To this end, we analyze the results of a survey sent to firms listed on a Canadian stock exchange that reincorporated after 1975. Second, the issue of whether jurisdiction shopping affects firm value is empirically assessed by means of an event study. Our results indicate that (1) inter-provincial reincorporations tend to be prompted by the transaction costs of carrying on a business, (2) federal reincorporations have a more substantive law-shopping component, and (3) certain reincorporation transactions statistically enhance firm value, but others diminish value.

Reincorporation, Corporate law, Event study, Canada

Abstract:
This paper provides theory and evidence relating information asymmetries and agency costs to exit outcomes in venture capital backed entrepreneurial firms. Where venture capitalists are able to better mitigate information asymmetries and agency costs faced by the new owners of the firm, they will be more likely to have a successful exit outcome. Information asymmetries and agency costs will vary depending on the characteristics of the venture capitalist and entrepreneurial firm, as well as the structure of the financing arrangement. This paper introduces a new dataset comprising all venture capital exits in Canada for the years 1991 to 2004. The data provide strong support for the conjecture that the ability to mitigate information asymmetries and agency costs is a central factor in influencing exit outcomes.

Venture Capital, Exits, Financial Contracts, IPOs, Acquisitions, Secondary Sales, Buybacks, Write-offs

Abstract:
This paper examines stock exchange trading rules for market manipulation, insider trading and broker agency conduct across countries and over time for 42 stock exchanges around the world. Some stock exchanges have extremely detailed rules which explicitly prohibit specific manipulative practices, while others use less precise and broadly framed rules. We create new indices for market manipulation, insider trading and broker-agency conduct based on the specific provisions in the exchange trading rules of each stock exchange. We show differences in exchange trading rules over time and across markets significantly affect trading activity.

Market Manipulation, Insider Trading, Broker Agency Conduct, Law and Finance

Abstract:
While competitive corporate law production has been well documented in the United States, there is a comparative dearth of Canadian evidence. This article addresses the question of whether the competitive model of corporate law production has operated, or could operate, in Canada. To this end, both the supply side and the demand side of the Canadian incorporation market are critically examined. The theory and empirical evidence indicate that institutional barriers have limited the extent of competitive corporate law production. The Uniformity Hypothesis, which postulates a legislative maximand of uniformity of provincial laws and not revenues derived from incorporation business, is advanced as a more compelling account of the observed pattern of Canadian corporate law reform. The evidence is consistent with related research indicating that jurisdiction shopping for corporate charters has not always resulted in gains for shareholders of Canadian corporations.

Abstract:
While competitive corporate law production has been well documented in the United States, there is a comparative dearth of Canadian evidence. This article addresses the question of whether the competitive model of corporate law production has operated, or could operate, in Canada. To this end, both the supply side and the demand side of the Canadian incorporation market are critically examined. The theory and empirical evidence indicate that institutional barriers have limited the extent of competitive corporate law production. The Uniformity Hypothesis, which postulates a legislative maximand of uniformity of provincial laws and not revenues derived from incorporation business, is advanced as a more compelling account of the observed pattern of Canadian corporate law reform. The evidence is consistent with related research indicating that jurisdiction shopping for corporate charters has not always resulted in gains for shareholders of Canadian corporations.

Abstract:
To obtain more funds from the institutional investors, private equity fund managers may report inflated valuations of private investee companies that are not yet sold. However, such overvaluations may result in a reputational cost when those investments are realized. Using evidence from 39 countries, we show that there are significant systematic biases in managers' reporting of fund performance. We find that these biases depend on the accounting and legal environment in a country, and on proxies for the degree of information asymmetry between institutional investors and private equity fund managers.

International Financial Reporting, Private Equity and Portfolio Diversification, Venture Capital

Abstract:
This paper explores the agency relationship between a lawyer and a client in the context of deciding whether to settle a case. The impact of alternative fee arrangements on settlement disputes is empirically assessed in discrete dependent variable econometric models utilizing survey data from lawyers in British Columbia. In contrast to the previous research based on traditional single-task principal-agent models, a broader multitask perspective of a lawyer's practice is explored. More frequent settlement disputes are observed where the handling of disbursements is one-sided, and among lawyers who advertise, use lump sum billing and pursue jury trials and punitive damages. Disputes are less frequent among lawyers who employ percentage contingency fees and hourly rate contracts with a bonus for successful results. Disputes are also less frequent among lawyers in larger firms. There is also evidence that legal fee regulation and ex post judicial review of legal fees in British Columbia have affected the frequency of settlement disputes.

Settlement disputes, Litigation, Multitask principal-agent

Abstract:
This paper explores the agency relationship between a lawyer and a client in the context of deciding whether to settle a case. The impact of alternative fee arrangements on settlement disputes is empirically assessed in discrete dependent variable econometric models utilizing survey data from lawyers in British Columbia. In contrast to the previous research based on traditional single-task principal-agent models, a broader multitask perspective of a lawyer's practice is explored. More frequent settlement disputes are observed where the handling of disbursements is one-sided, and among lawyers who advertise, use lump sum billing and pursue jury trials and punitive damages. Disputes are less frequent among lawyers who employ percentage contingency fees and hourly rate contracts with a bonus for successful results. Disputes are also less frequent among lawyers in larger firms. There is also evidence that legal fee regulation and ex post judicial review of legal fees in British Columbia have affected the frequency of settlement disputes.

Settlement disputes, Litigation, Multitask principal-agent

Abstract:
This paper examines cross-country evidence on the duration of venture capital (VC) investment. We formulate a theory of VC investment duration based on the idea that venture capitalists exit when the expected marginal cost of maintaining the investment is greater than the expected marginal benefit, and thereby relate VC investment duration to entrepreneurial company characteristics, investor characteristics, deal characteristics, and institutional and market conditions. VC investment duration data in Canada and the US lend strong support to the theoretical predictions developed herein.

Venture Capital, Duration, Exits, Initial Public Offerings, Write-offs, Public Policy

Abstract:
This paper empirically considers the role of preplanned exits (the investor's initial strategy to sell the investee company via an acquisition or an IPO at the time of initial contract with the entrepreneur), legal conditions and investor versus investee bargaining power in the allocation of cash flow and control rights in entrepreneurial finance. We introduce a sample of 223 entrepreneurial investee firms financed by 35 venture capital funds in 11 continental European countries, and these data indicate the following. First, preplanned acquisition exits are associated with stronger investor veto and control rights, and a greater probability that convertible securities will be used, and a lower probability that common equity will be used; the converse is observed for preplanned IPOs. Second, investors take fewer control and veto rights and use common equity in countries of German legal origin, relative to Socialist, Scandinavian and French legal origin. Third, more experienced entrepreneurs are more likely to get financed with common equity and less likely to be financed with convertible preferred equity, while more experienced investors are more likely to use convertible preferred equity and less likely to use common equity.

Preplanned Exit, Contracts, Governance, Control Rights, Bargaining Power, Law and Finance

Abstract:
We analyze the economic consequences of disclosure and regulation within a context of significant information asymmetry and lenient regulation. In Canada, firms can enter the stock market at a pre-revenue stage, using full disclosure (initial public offerings, IPOs) or the minimal disclosure allowed by reverse mergers (RMs). Our sample is a set of 1,455 IPOs and RMs between 1993 and 2003. Controlling for several dimensions, including self-selection, we find that the level of disclosure and regulation significantly influence the value and long-run performance of newly listed firms. Overall, our results suggest that disclosure has a significant economic impact. These results are consistent with theories suggesting that a commitment by a firm to increase its disclosure level lowers the information asymmetry component of the cost of capital. The results are also consistent with the hypothesis that increased disclosure reduces the heterogeneity of expectations and mispricing.

Disclosure, Securities Regulation, Initial Public Offerings, Reverse Mergers, Listing Standards

Abstract:
This paper reviews a timely legal book on Global Venture Capital Transactions (Brechbuehl and Wooder, 2004) in the context of academic entrepreneurial finance work on venture capital contracting. Legal scholarship in Global Venture Capital Transactions is provided for 12 countries (Austria, Belgium, Canada, Finland, Germany, Hong Kong, Hungary, India, Italy, The Netherlands, Taiwan, and the US). This paper relates then the legal scholarship in Global Venture Capital Transactions to empirical evidence from entrepreneurial finance scholarship on venture capital contracting. Contracting data from cross-border financings of US VCs financing Canadian entrepreneurs are also introduced in this paper to illustrate the role of the law in venture capital transactions.

International Venture Capital, Financial Contracting

Abstract:
This paper introduces a dataset of securities used by US and Canadian venture capitalists (VCs) in seed, early and expansion stage Canadian entrepreneurial firms spanning the period 1991-2004. The data indicate Canadian limited partnership VCs are more likely to use common equity and convertible securities than Canadian corporate VCs, while Canadian corporate VCs are more likely to use non-convertible debt than Canadian limited partnership VCs. Similar patterns in security design are observed in the data in this paper for cross-border US limited partnership and corporate VC investments in Canadian entrepreneurial firms. Related evidence also indicates very similar contracting practices for European corporate VC investments. The securities used offer one explanation as to why corporate VC performance is typically less successful than limited partnership VC performance. The data also challenge the conventional wisdom that VCs always use convertible preferred equity.

Corporate Venture Capital, Financial Contracting

Abstract:
This paper examines the impact of securities regulation and exchange listing standards on the valuation of venture capital-backed IPOs in Canada and the United States. We create a matched sample of matched IPOs in both countries by size and sector over the 1986-2004 period. The data strongly indicate IPO valuations are lower in Canada by 57% to 71%, depending on the matched sample and control variables. Also, we show IPOs are valued higher for companies with higher levels of sales, R&D, insider ownership, but valued less where there is a greater percentage of pre-IPO ownership sold by the insiders.

Securities regulation, Valuation, Initial Public Offerings; Venture capital, Listing Standards

Abstract:
In 2005, the Government of Ontario announced the phase out of the Labour Sponsored Venture Capital Corporation (LSVCC) tax credit, which will be become effective in 2011. Some media attention has suggested this might lead to difficulty for Ontario entrepreneurs and emerging companies in raising capital. This study presents evidence from Ontario innovative healthcare companies that capital raising concerns are not related to the phasing out of the LSVCC tax credit, and this evidence is consistent with evidence of extreme underperformance of LSVCCs. However, amongst companies currently funded by LSVCCs, there is significant concern about the phase out of the tax credit, which can be explained by LSVCC shareholder agreements. Policymakers should account for companies currently funded by LSVCCs to efficiently facilitate the phase out of the tax credit.

Canadian Tax Policy, Entrepreneurship, Venture Capital

Abstract:
We examine the dynamics of the positive sorting in the venture capital (VC) industry by analyzing how the relationship between VCs and entrepreneurial firms evolves as new information regarding the potential of the company is learned. We empirically show that higher-quality companies previously associated with less reputable VCs are more likely to switch to more reputable ones and obtain higher pre-money valuation but smaller investment size in follow-on rounds. On the contrary, lower-quality companies are more likely to switch to less reputable VCs while none of the existing VCs continue investing in them. This group of companies obtain larger investment size but lower pre-money valuation in follow-on rounds. Furthermore, on average, it takes more time for switchers to obtain follow-on financing than non-switchers, which is most significant for those low-quality switchers.

Venture Capital, Switching

Abstract:
This paper empirically examines business starts and deaths in relation to US public policy. Controlling for economic conditions, bankruptcy laws, venture capital investment and other factors, and using the most recent (as at 07/2009) US state level census data which covers the 1995-2005(Q1) period, we find robust evidence of more business starts with 1-4 employees in states with fewer government transfers, lower taxation, and lower minimum wages. Transfers and subsidies are associated with fewer business deaths. The data indicate business starts with over 10 employees are unrelated to government subsidies and taxation but do show a strong negative relation with labor frictions. Apart from the quantity of business creation, proxies for the quality of entrepreneurial activities show government policy in a more favorable light in terms of a positive effect associated with government transfers and subsidies.

Entrepreneurship, Taxation, Labor Law, Bankruptcy, Public Policy

Abstract:
This paper provides an overview of the literature on international entrepreneurship (henceforth, IE). In doing so, we adopt a broad perspective on IE, consistent with the notion that entrepreneurship refers to how opportunities to create future goods and services are discovered, evaluated and exploited (Venkataraman, 1997). After providing focused summaries of the papers included in the special issue, we outline a research agenda to improve our understanding of the determinants and outcomes of IE. We also highlight several methodological issues of particular importance to IE research.

international entrepreneurship, signalling, dissonance theory, resource-based view, social networks, organization learning

Abstract:
This paper examines the impact of the 2001 UCITS III Directive on international distributions of European investment funds from 2002-2008. We analyze several dimensions of the notification decision: (1) whether the fund is distributed cross-border; (2) the number of countries where funds are notified for distribution; and (3) the population size implied by the notification list. Although UCITS III facilitated international distributions, it did so with costs that disadvantaged smaller funds, and did not have effective procedures to facilitate fund mergers. Consistent with these regulatory impediments, our comprehensive dataset on European investment funds shows that larger fund promoters and funds domiciled in smaller countries have much wider distributions, but merged funds have a narrower scope of international notifications. Also, we document that the international scope of notifications is concave in that fewer new countries are notified over time. As well, we empirically show an increase in the number of fund promoters that distribute UCITS funds outside the European Union, notably in Asia, which can be attributable to the superior investor protection of UCITS regulation. We find that notifications in Asian countries are mostly done by non-European promoters (primarily US promoters).

Mutual funds industry, International distribution, UCITS, Law and finance