What Role of Legal Systems in Financial Intermediation? Theory and Evidence

Laura Bottazzi (), Marco Da Rin () and Thomas Hellmann ()

No 283, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: How does the relationship between an investor and entrepreneur depend on the legal system? In a double moral hazard framework, we show how optimal contracts, corporate governance, and investor actions depend on the legal system. With better legal protection, investors give more non-contractible support, demand more downside protection, and exercise more governance. Investors in better legal systems develop stronger governance and support competencies. Therefore, when investing in a different legal systems they behave differently than local investors. We test these predictions using a hand-collected dataset of European venture capital deals. The empirical results confirm the predictions of the model.

New Economics Papers: this item is included in nep-cfn, nep-eec and nep-reg
Date: 2005
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