Entrepreneurial Litigation and Venture Capital Finance

33 Pages Posted: 18 Mar 2011 Last revised: 16 Feb 2012

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Bruce Haslem

Southern Utah University - Department of Economics and Finance

April M. Knill

Florida State University College of Business; Florida State University - College of Law

Multiple version iconThere are 2 versions of this paper

Date Written: March 15, 2011

Abstract

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.

Keywords: Litigation, Venture Capital, Underpricing

JEL Classification: G24, K4, L26

Suggested Citation

Cumming, Douglas J. and Haslem, Bruce and Knill, April M., Entrepreneurial Litigation and Venture Capital Finance (March 15, 2011). International Conference of the French Finance Association (AFFI), May 2011, Available at SSRN: https://ssrn.com/abstract=1786479 or http://dx.doi.org/10.2139/ssrn.1786479

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Bruce Haslem

Southern Utah University - Department of Economics and Finance ( email )

Cedar City, UT 84720
United States

April M. Knill (Contact Author)

Florida State University College of Business ( email )

Tallahassee, FL 32306-1042
United States
(850) 644-2047 (Phone)

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States

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