Scandinavian Working Papers in Economics

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 ()
Additional contact information
Steven N. Kaplan: University of Chicago, Postal: Graduate School of Business, 1101 East 58th Street, Chicago, IL 60637, USA
Frederic Martel: UBS Global Asset Management, Postal: Gessnerallee 3-5, CH-8005, Zurich
Per Strömberg: Swedish Institute for Financial Research, Postal: Saltmätargatan 19 A, 4th fl., SE-113 59 Stockholm, Sweden

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

JEL-codes: G24; G32

44 pages, September 15, 2004

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