Legality and Venture Capital Exits

38 Pages Posted: 28 Oct 2002 Last revised: 10 Sep 2008

See all articles by Grant Fleming

Grant Fleming

Continuity Capital Partners

Armin Schwienbacher

SKEMA Business School

Douglas J. Cumming

Florida Atlantic University

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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.

Keywords: Venture Capital, Exits, IPO, Acquisition, Law and Finance

JEL Classification: G24, G28, G31, G32, G35

Suggested Citation

Fleming, Grant Alan and Schwienbacher, Armin and Cumming, Douglas J., Legality and Venture Capital Exits. Journal of Corporate Finance, Vol. 12, pp. 214-245, 2006, Available at SSRN: or

Grant Alan Fleming

Continuity Capital Partners ( email )

GPO Box 314
Canberra, Australian Capital Territory 2601

Armin Schwienbacher

SKEMA Business School ( email )

Avenue Willy Brandt
Euralille, 59777


Douglas J. Cumming (Contact Author)

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States


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