How Do Legal Differences and Learning Affect Financial Contracts?

Posted: 1 Dec 2009

See all articles by Steve Kaplan

Steve Kaplan

University of Chicago

Frederic Martel

UBS Global Asset Management; University of Lausanne IMD

Per Strömberg

Swedish House of Finance; ECGI; CEPR

Date Written: 2003


In order to determine whether the financial contractsobserved in the United States are optimal in other institutional environments,venture capital contracts in twenty-three international companies are comparedto those in the United States. The sample included 145 investments in 107companies in 23 countries by 70 different leading venture capitalists(VCs). Each VC was asked to provide investment information, including the company'sbusiness plan and his or her own internal analysis of the investment. Theanalysis reveals that contracts differ significantly across legal regimes. Morespecifically, investments in common law countries are more likely to resembleU.S. contracts, while investments elsewhere are likely to differ. More experienced VCs are likely to implement U.S.-style contracts regardlessof legal regime. Furthermore, VCs who use U.S.-style contracts are less likelyto fail than those who do not. Taken together, the results suggest thatU.S.-style contracts are indeed optimal across a wide range of legalregimes. The tendency of experienced VCs to rely on them may be attributed to thefact that contracts in the United States have developed over several businesscycles and are effective. It is reasonable to expect more convergence towardU.S.-style contracts in the future. (SAA)

Keywords: Common law systems, Control rights, Legal systems, Organizational learning, Contracts & agreements, Investments, Venture capital, Commercial law, Financial contracts

Suggested Citation

Kaplan, Steve and Martel, Frederic and Stromberg, Per, How Do Legal Differences and Learning Affect Financial Contracts? (2003). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN:

Steve Kaplan

University of Chicago

1101 East 58th Street
Chicago, IL 60637
United States

Frederic Martel

UBS Global Asset Management ( email )

Zurich, CH-8098
+41 1 235 56 93 (Phone)
+41 1 235 55 90 (Fax)

University of Lausanne IMD

Quartier Chambronne
Lausanne, Vaud CH-1015

Per Stromberg

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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