Entrepreneurial Litigation and Venture Capital Finance
York University - Schulich School of Business
Southern Utah University - Department of Economics and Finance
April M. Knill
Florida State University
March 15, 2011
International Conference of the French Finance Association (AFFI), May 2011
This paper empirically examines the impact of entrepreneurial firm plaintiff litigation on the ability of entrepreneurial firms to obtain venture capital (VC), and the subsequent effect on VC exit outcomes. This empirical context is important, as both the costs of litigation and potential benefits are arguably more pronounced for start-ups relative to established firms. We consider cases of litigation being initiated both before and during VC financing. The data indicate (1) plaintiff firms are more likely to obtain financing by less reputable VCs, (2) VCs provide more oversight of plaintiff firms relative to non-plaintiff firms in their portfolio, (3) plaintiff firms are more likely to exit by an IPO (versus acquisition), and less likely to be defunct at the end of the investment period; these exit outcomes are more pronounced for successful plaintiff firms, and (4) underpricing is reduced when PCs win or lose cases but is increases when cases are settled. For all results, implications are less severe for litigants who begin their suit after VC suggesting these entrepreneurial litigants have the backing of the VC.
Number of Pages in PDF File: 33
Keywords: Litigation, Venture Capital, Underpricing
JEL Classification: G24, K4, L26working papers series
Date posted: March 18, 2011 ; Last revised: February 16, 2012
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