Institutional Frameworks, Venture Capital and the Financing of European New Technology‐Based Firms

17 Pages Posted: 30 Apr 2014

See all articles by Tom R. Vanacker

Tom R. Vanacker

Ghent University; University of Exeter Business School

Andy Heughebaert

Ghent University - Faculty of Economics and Business Administration

Sophie Manigart

Vlerick Business School; Ghent University

Date Written: May 2014

Abstract

Manuscript Type. Empirical. Research Question/Issue. We first study how cross‐country differences in shareholder protection against self‐dealing and personal bankruptcy laws affect the financing of new technology‐based firms (NTBFs). Second, we study how venture capital (VC) investors – as expert monitors and initiators of “good” governance practices in firms – moderate aforementioned relationships. Research Findings/Insights. Using a unique longitudinal dataset of 6,813 NTBFs from six European countries, we find that better shareholder protection rights increase the probability of raising external equity financing and allow firms to raise larger amounts of equity financing. Less forgiving personal bankruptcy laws decrease the probability of raising debt financing and limit the amount of debt financing that is raised. VC ownership strengthens the aforementioned relationships. Theoretical/Academic Implications. This study is one of the first to provide evidence on the relationship between national legal systems and the financing of private NTBFs. We further address a recurring call for more research on the interaction between country‐level legal systems and firm‐level corporate governance. In particular, we show that expert monitors, such as VC investors, strengthen the relationship between national legal systems and NTBF's access to external financing. Practitioner/Policy Implications. Policy makers often focus on increasing the supply of VC financing as a panacea for external financing constraints experienced by NTBFs. This study shows that VC ownership is particularly effective at increasing firms' access to external financing in countries with strong investor protection rights and entrepreneur‐friendly personal bankruptcy laws.

Keywords: Corporate Governance, Financing, Shareholder Protection, Personal Bankruptcy Laws, Venture Capital

Suggested Citation

Vanacker, Tom R. and Heughebaert, Andy and Manigart, Sophie, Institutional Frameworks, Venture Capital and the Financing of European New Technology‐Based Firms (May 2014). Corporate Governance: An International Review, Vol. 22, Issue 3, pp. 199-215, 2014. Available at SSRN: https://ssrn.com/abstract=2431033 or http://dx.doi.org/10.1111/corg.12046

Tom R. Vanacker (Contact Author)

Ghent University ( email )

Sint-Pietersplein 7
Gent, 9000
Belgium

University of Exeter Business School ( email )

Streatham Court
Exeter, EX4 4JH
United Kingdom

Andy Heughebaert

Ghent University - Faculty of Economics and Business Administration ( email )

Ghent, B-9000
Belgium

Sophie Manigart

Vlerick Business School ( email )

Reep 1
Ghent, BE-9000
Belgium

Ghent University ( email )

Sint-Pietersplein 7
Gent, 9000
Belgium

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