What is the role of legal systems in financial intermediation? Theory and evidence

Bottazzi, Laura, Da Rin, Marco and Hellmann, Thomas (2009) What is the role of legal systems in financial intermediation? Theory and evidence. Journal of Financial Intermediation, 18 (4). pp. 559-598.


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.

Item Type: Article
Keywords: venture capital; entrepreneurship; legal systems; finance
Subject(s): Finance
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Date Deposited: 11 Dec 2014 11:31
Last Modified: 23 Feb 2017 09:51
Funders: European Commission (Grant HPSE-CT-2002-00140), Italian Ministry of Research (FIRB grant RBAU013CNJ), European Investment Fund, Bocconi University Ricerca di Base 2004
URI: http://eureka.sbs.ox.ac.uk/id/eprint/5227

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