Legality and Venture Capital Exits
Continuity Capital Partners
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, G35Accepted Paper Series
Date posted: October 28, 2002 ; Last revised: September 10, 2008
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