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What is the role of legal systems in financial intermediation? Theory and evidence
Bottazzi,L. Da Rin,M. Hellmann,T.
Bottazzi,L.
Da Rin,M.
Hellmann,T.
Abstract
We develop a theory and empirical test of how the legal system affects the relationship between venture capitalists and entrepreneurs. The theory uses a double moral hazard framework to show how optimal contracts and investor actions depend on the quality of the legal system. The empirical evidence is based on a sample of European venture capital deals. The main results are that with better legal protection, investors give more non-contractible support and demand more downside protection. These predictions are supported by the empirical analysis. Using a new empirical approach of comparing two sets of fixed-effect regressions, we also find that the investor’s legal system is more important than that of the company in determining investor behavior.
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Appeared earlier as CentER DP 2008-30
Date
2009
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Bottazzi, L, Da Rin, M & Hellmann, T 2009, 'What is the role of legal systems in financial intermediation? Theory and evidence', Journal of Financial Intermediation, vol. 18, no. 4, pp. 559-598.