Legality and venture capital exits
, Grant Fleming
, Armin Schwienbacher
School of Banking and Finance, University of New South Wales, Sydney, NSW 2052, Australia
School of Finance and Applied Statistics, Faculty of Economics and Commerce,
Australian National University, Canberra, Australia
University of Amsterdam, Finance Group, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands
Received 10 December 2003; accepted 10 December 2004
Available online 30 September 2005
This paper introduces an analysis of the impact of Legality on the exiting of venture capital
investments. We consider a sample of 468 venture-backed companies from 12 Asia-Pacific countries,
and these countries’ venture capitalists’ investments in US-based entrepreneurial firms. The data
indicate IPOs are more likely in countries with a higher Legality index. This core result is robust to
controls for country-specific stock market capitalization, MSCI market conditions, venture capitalist
fund manager skill and fund characteristics, and entrepreneurial firm and transaction characteristics.
Although Black and Gilson (1998) [Black, B.S., Gilson, R.J., 1998. Venture capital and the structure
of capital markets: banks versus stock markets. Journal of Financial Economics 47, 243–77]
0929-1199/$ - see front matter D 2005 Elsevier B.V. All rights reserved.
An earlier version of this paper was entitled bA Law and Finance Analysis of Venture Capital. Exits in
Emerging MarketsQ with a prior dataset involving fewer transactions and fewer details per transaction. We owe a
special thanks to an anonymous referee for many helpful suggestions. We also owe thanks to Wilshire Associates,
Inc. for providing the data for this paper and to Kate Humphreys for research assistance. The views expressed in
this paper do not represent those of Wilshire Associates, Inc. We owe thanks to the seminar participants at the
European Finance Association Annual Conference (Glasgow, 2003), and in particular to Sanjiv Das for a very
helpful discussion. This paper was further presented at the CAFR Symposium (Hong Kong, June 2004).
* Corresponding author. Present address: Severino Center for Technological Entrepreneurship, Lally School of
Management and Technology, Rensselaer Polytechnic Institute, 110 8th Street, Troy, NY 12180, USA. Tel.: +1
518 276 8398; fax: +1 518 276 8661.
E-mail addresses: Douglas@Cumming.com (D. Cumming), firstname.lastname@example.org (G. Fleming),
A.Schwienbacher@uva.nl (A. Schwienbacher).
URLs: http://banking.web.unsw.edu.au/staff/profiles/dcumming/index.shtml (D. Cumming),
http://www.fee.uva.nl/fm (A. Schwienbacher).
Tel.: +61 2 6125 2269; fax: +61 2 6125 5005.
Tel.: +31 20 525 7179; fax: +31 20 525 5285.
Journal of Corporate Finance 12 (2006) 214 – 245