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Legality and Venture Capital Exits

Grant Fleming

Continuity Capital Partners

Armin Schwienbacher

Univ. Lille Nord de France - SKEMA Business School

Douglas J. Cumming

York University - Schulich School of Business

Journal of Corporate Finance, Vol. 12, pp. 214-245, 2006

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.

Number of Pages in PDF File: 38

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

JEL Classification: G24, G28, G31, G32, G35

Accepted Paper Series

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Date posted: October 28, 2002 ; Last revised: September 10, 2008

Suggested Citation

Fleming, Grant and Schwienbacher, Armin and Cumming, Douglas J., Legality and Venture Capital Exits. Journal of Corporate Finance, Vol. 12, pp. 214-245, 2006. Available at SSRN: http://ssrn.com/abstract=329160 or http://dx.doi.org/10.2139/ssrn.329160

Contact Information

Grant Alan Fleming
Continuity Capital Partners ( email )
GPO Box 314
Canberra, Australian Capital Territory 2601
Armin Schwienbacher
Univ. Lille Nord de France - SKEMA Business School ( email )
Douglas J. Cumming (Contact Author)
York University - Schulich School of Business ( email )
4700 Keele Street
Toronto, Ontario M3J 1P3
HOME PAGE: http://www.venturecapitalprivateequitycontracting.com/
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