Law, Finance, and Venture Capitalists' Asset Allocation Decisions

What is it about?

This study finds venture capitalists are more likely to invest in relatively small firms in countries with relatively less developed legal environments and more likely to invest in relatively large or mature firms in countries with better legal environments.

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Why is it important?

In so far as the financing of privately held firms with equity securities is concerned, my findings provide evidence that moral hazard problems become more significant with the quality of the legal environment. These findings indicate small firms in less developed legal environments are more constrained financially than small firms in better developed legal environments. Correspondingly and in so far as private markets are concerned, the empirical results indicate large firms in better developed legal environments are more financially constrained in relation to large firms in less developed legal environments.

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