Scandinavian Working Papers in Economics
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Institute for Financial Research SIFR Research Report Series, Institute for Financial Research

No 28:
How Do Legal Differences and Learning Affect Financial Contracts?

Steven N. Kaplan (), Frederic Martel and Per Strömberg ()

Abstract: 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; Corporate governance; (follow links to similar papers)

JEL-Codes: G24; G32; (follow links to similar papers)

44 pages, September 15, 2004

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