DP4161 How Do Legal Differences and Learning Affect Financial Contracts?

Author(s): Steven Kaplan , Frederic Martel , Per Johan Strömberg

Publication Date: December 2003

Keyword(s): investment banking , venture capital , brokerage , financing policy , capital and owner ship structure

JEL(s): G24 , G32

Programme Areas: Financial Economics

Link to this Page: www.cepr.org/pubs/dps/DP4161.asp

We analyse venture capital (VC) investments in 23 non-US countries and compare them to VC investments in the US. We describe how the contracts allocate cash flow, board, liquidation, and other control rights. In univariate analyses, contracts differ across legal regimes. At the same time, however, more experienced VCs implement US-style contracts regardless of legal regime. In most specifications, legal regime becomes insignificant controlling for VC sophistication. VCs who use US-style contracts fail significantly less often. Financial contracting theories in the presence of fixed costs of learning, therefore, appear to explain contracts along a wide range of legal regimes.