How Do Legal Differences and Learning Affect Financial Contracts?
43 Pages Posted: 21 Jun 2004
Date Written: June 16, 2004
We analyze venture capital (VC) investments in twenty-three non-U.S. countries and compare them to U.S. VC investments. We describe how the contracts allocate cash flow, board, liquidation, and other control rights. In univariate analyses, contracts differ across legal regimes. However, more experienced VCs implement U.S.-style contracts regardless of legal regime. In most specifications, legal regime becomes insignificant controlling for VC sophistication. VCs who use U.S.-style contracts fail significantly less often. The results suggest that U.S.-style contracts are efficient across a wide range of legal regimes. The evolution of contracts is consistent with financial contracting theories and costly learning.
Keywords: Venture Capital, financial contracting, law and finance, capital and ownership structure
JEL Classification: G24, G32
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