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The Geography of Venture Capital Contracts

43 Pages Posted: 18 Mar 2009  

Ola Bengtsson

Lund University School of Economics and Management; Research Institute of Industrial Economics (IFN)

S. Abraham Ravid

Yeshiva University - Syms School of Business

Date Written: March, 17 2009

Abstract

We show that geographical elements and regional culture can play an essential role in contract design in addition to the influence of more "traditional" determinants such as information and agency problems or the nature of legal institutions. Across 1,800 financial contracts written between U.S. entrepreneurial companies and U.S. Venture Capital (VC) investors, we show that contracts include significantly fewer investor-friendly cash flow contingencies if the company is located in California or if the lead VC is more exposed to the California market. The regional differences in contract design can, to some degree, be explained by the level of concentration of local VC markets. We also show that when the geographical distance between a VC and a company is greater, contracts give high-powered incentives to entrepreneurs by including more investor-friendly cash flow contingencies. This latter finding supports the view that geographical proximity enhances monitoring and soft information. However, the "California effect" persists even after we control for distance and VC market concentration.

Keywords: Venture Capital, Entrepreneurship, Financial Contracting, Geography

JEL Classification: G24, L26

Suggested Citation

Bengtsson, Ola and Ravid, S. Abraham, The Geography of Venture Capital Contracts (March, 17 2009). Available at SSRN: https://ssrn.com/abstract=1361827 or http://dx.doi.org/10.2139/ssrn.1361827

Ola Bengtsson (Contact Author)

Lund University School of Economics and Management ( email )

P.O Box 7080
Lund
Sweden

HOME PAGE: http://www.olabengtsson.com

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

S. Abraham Ravid

Yeshiva University - Syms School of Business ( email )

United States

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