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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|12985||2007||39 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Financial Intermediation, Volume 16, Issue 3, July 2007, Pages 273–311
We analyze venture capital (VC) investments in twenty-three non-US countries and compare them to US VC investments. We describe how the contracts allocate cash flow, board, liquidation, and other control rights. In univariate analyses, contracts differ across legal regimes. However, more experienced VCs implement US style contracts regardless of legal regime. In most specifications, legal regime becomes insignificant controlling for VC experience. VC firms that do not use US style contracts fail significantly more often, even controlling for VC experience. The results are consistent with US style contracts being efficient across a wide range of legal regimes.
Financial contracting plays an important role in aligning incentives and mitigating agency conflicts between investors and entrepreneurs, thus allowing new ventures to obtain financing.1 Studies of US venture capital (VC) investing, such as Sahlman (1990) and Kaplan and Strömberg, 2003 and Kaplan and Strömberg, 2004, show that investor contracts carefully allocate cash flow rights, liquidation rights, and control rights between the entrepreneur and the VC investor in order to mitigate agency conflicts. Kaplan and Strömberg, 2003 and Kaplan and Strömberg, 2004 also show that the characteristics of US VC contracts are consistent with the contracts predicted by financial contracting theories such as Aghion and Bolton (1992), Dessein (2005), and Dewatripont and Tirole (1994). At the same time, the large and growing literature in law and finance finds that legal and institutional differences among countries appear to be important for the development and nature of financial markets, and also for economic growth.2 The ability to design investments and financial contracts is potentially dependent on various elements of the institutional environment—the nature of corporate and contract law, the quality of legal enforcement, accounting systems, tax regulations, financial markets, etc. If the institutional environment affects the types of contracts that can be written, this could change the types of contracts that are used.3 This raises the question of whether the financial contracts observed in the US are suitable in other institutional environments. Theories of financial contracting would suggest yes (because they assume property rights are enforced and little else). Alternatively, sufficient differences in legal institutions or enforcement might lead to a negative answer. In this paper, we address this question by studying VC investments across different institutional environments—145 investments in 107 companies in 23 countries by 70 different lead VCs. First, we describe how the contracts allocate cash flow, board, liquidation, and other control rights. In univariate analyses, the contracts differ significantly across legal regimes. VCs investing outside the US deals have weaker control, liquidation and exit rights. Non-US investments also are less likely to use contingencies—including milestones, vesting provisions and anti-dilution rights—resulting in less high-powered cash flow incentives compared to their US counterparts. These differences are manifest to some extent by the relatively greater use of ordinary common stock in Europe and less frequent use of convertible preferred. Next, we consider how the contracts vary across legal regimes. We find that the contracts vary systematically across those regimes. In particular, investments in common law countries are more likely to look like US contracts while investments elsewhere are likely to differ. Liquidation preferences, anti-dilution protections, vesting provisions and redemption rights are more typical in common law countries while milestones are less common. These results are similar to those found in Lerner and Schoar (2005) who study private equity investments in developing countries. In this part of the analysis, we also consider how well specific measures of the legal and institutional environment (such as creditor protection, efficiency of the legal system, tax treatment, etc.) explain the differences across legal regimes. The specific measures are not consistently related to the contractual differences (in contrast to the legal regime variables). Given the mixed results for institutional factors, we then consider the importance of individual VC characteristics and experience. In examining the contracts, we find that some VC firms implement US contractual features across all the countries and institutional environments in which they invest. In univariate analyses, we find that larger VCs, more experienced VCs, and VCs with more exposure to US are significantly more likely to implement US style contractual terms. The results indicate that while it may not be easy or obvious how to adapt contracts, with enough effort (or legal fees), VCs can replicate most US style contracts. The results to this point lead us to compare the relative importance of legal regime and VC experience. We estimate the determinants of contracts using regressions that include both legal regime variables and measures of VC experience or sophistication. In the presence of the VC experience variables, legal regime and institutional differences are relatively less important. In fact, the legal regime variables are not significant in most specifications. We also use the country trust indices from Guiso et al. (2004) and find that VCs from more “trusting” countries are less likely to implement US style contracts. There are two primary interpretations of the experience results. First, they are consistent with the US model and US contracts being more efficient. According to this view, more experienced and successful VCs should use better contracts. The result on “trust” would help explain why less experienced VCs do not use the “tougher” US contracts. The second interpretation is not that the US contracts are more efficient or better, but simply that they are the contracts with which more experienced VCs are familiar. We provide suggestive evidence to distinguish between these interpretations by studying the survival of the 70 VCs represented as lead investors in our sample. As of March 2005, 59 of the 74 VC firms are still active while 15 have not survived as independent entities. We separate the VC firms depending on the securities they used when acting as lead investors. Only one of the 38 firms that exclusively used convertible preferred (and US style contracts) failed. In contrast, 41% of the 31 firms that exclusively used common stock (and non-US style contracts) have not survived. Said another way, of the 15 firms that have not survived, all but two never used convertible preferred. The results persist in multivariate analyses where we control for other VC and portfolio company characteristics. The survival results suggest that less successful funds do not use US style contracts. Our results indicate that US style contracts can be implemented across a wide range of legal regimes and are used by the more experienced and successful VCs. Although it is not possible to establish causality, we believe a plausible interpretation is that US style contracts are relatively efficient across a wide range of institutional environments. This interpretation is in the spirit of Fama and Jensen (1983) who argue that contractual features that survive are likely to be efficient. As noted earlier, the separate allocation of cash flow, control and liquidation rights found in US style contracts is consistent with/predicted by standard financial contracting theories. We also discuss other possible interpretations. Finally, we find some evidence that is consistent with fixed costs of learning. All of the funds in our sample that used both non-US and US style contracts at some point, switched from non-US to US style during the sample period. This result and the survival results suggest that there will be more convergence in contracts over time. Ours is not the first paper to study VC contracts outside of the US.4 Unlike this paper, however, most previous studies focus on a single country and do not compare contracts across institutional environments. Also, most of the studies do not analyze the actual contracts, but, instead, rely on survey evidence and self-reporting from VC firms. This is problematic because the studies critically depend on the details of the survey design and template. For example, as Kaplan and Strömberg (2003) demonstrate, securities with different names can implement identical allocations of cash flow and control rights (such as convertible preferred vs. senior common stock), while securities with the same name can differ substantially in their rights (e.g. standard vs. participating preferred stock). In contrast to earlier studies, but similar to ours, contemporaneous work by Lerner and Schoar (2005) uses actual contracts in private equity investments in developing countries. We view their sample and paper as an interesting complement to ours. They find similar results in that contracts are significantly related to legal origin. While they do not focus on the experience effects that we consider, their results on legal origin are robust to including a dummy variable for US or UK based organization. Lerner and Schoar (2005) conclude that systematic differences in legal enforcement impose constraints on the type of contracts that can be written and that lack of contract enforcement may not be easily undone by private contracting arrangements that emphasize ownership. There are at least three possible explanations as to why our results and conclusion appear to differ from theirs. First, legal differences, particularly, differences in enforcement, may be more of a constraint in developing countries. Our sample is taken largely from countries with good legal enforcement. At the same time, however, for the subsample of our companies from developing countries, the experienced VCs still implement US style contracts. Second, Lerner and Schoar primarily study private equity investments in more mature businesses rather than VC investments. It may be more difficult to contract around existing contracts and governance mechanisms in existing companies. This is consistent with discussions we have had with VC investors. Finally, their sample includes a substantial percentage of transactions in which the investors obtain majority control, making separate control and liquidation rights less important, if not irrelevant. Again, even in developing countries, we find that it is unusual for VCs to take majority stakes. Botazzi et al. (2004) consider similar issues using survey data from a large sample of VC investments across Europe. They also find that downside protection in contracts is more typical in common law countries and countries with better legal protection. In addition, they find that investors provide more non-contractible support in those countries. In a related paper, Cumming and Johan (2006) look at the contracts between VCs and their institutional investors around the world. They obtain a result similar to ours in that the legal experience of the VCs has an economically greater effect on the contracts than the legal regime of the country of the VC fund. Our paper also complements earlier work on global venture capital activity. In a cross-country study, Jeng and Wells (2000) show that factors such as IPO activity, government policies toward start-ups, and labor market rigidities help explain differences in aggregate venture capital activity between countries. Similarly, Mayer et al. (2005) argue that country differences in the composition of investors who provide funds to VC firms (banks, insurance companies, pension funds, private corporations) result in different VC portfolio characteristics across countries with respect to stage, geography, and industry focus. The paper proceeds as follows. In Section 2, we discuss the sample. In Section 3, we present our univariate analyses of the sample contracts and consider the (univariate) relation of those contracts to legal and institutional factors, as well as VC characteristics. In Section 4, we present our multivariate results. In Section 5, we relate the contractual terms to VC survival. In Section 6, we conclude.
نتیجه گیری انگلیسی
In this paper, we compare VC contracts in twenty-three other countries to those in the US. We analyze how the contracts allocate cash flow, board, liquidation, and other control rights. In univariate analyses, contracts differ across legal regimes. US style contracts are more typical in common law countries. However, there appear to be few institutional impediments to implementing US style terms. More experienced VCs are able to implement US style contracts regardless of legal regime. VCs from less trusting countries also are more likely to implement US style contracts. In multivariate specifications, measures of VC experience and trust are more influential in explaining the use of US style terms than legal regime or other legal, and institutional variables. Finally, we consider the subsequent survival rate of the VCs in our sample. VCs who use US style contracts are substantially and significantly less likely to fail. The VCs who switched styles all moved from non-US to US style contracts. And the VCs do not appear to use US style contracts to trade off downside protection for upside. We think the most plausible interpretation of our results is as follows. The contracts in the US have developed over several business cycles and are effective. The results in Kaplan and Strömberg (2003) suggest that many elements of these US contracts are consistent with the predictions of optimal contracting theories. Venture capital investing outside of the US is relatively more recent, the VC firms are less experienced overall, and the legal rules are different. Learning about effective contracts takes time and effort. Even in cases where VCs would like to implement US style contracts, it may not be costless to do so. First, US style contracts require legal expenses to adapt to different legal systems. Second, such contracts can complicate the bargaining with entrepreneurs who also must be educated. Third, VCs from more trusting cultures may not understand the need for or usefulness of US style contracts. If contracts are important for VC success, VCs using efficient contracts will be more likely to survive and surviving VCs will be more likely to switch to more efficient contracts. One might also expect the evolution to accelerate in periods of high volatility such as the post-2000 tech crash. This interpretation is supported by the survival results, the switching results, and the finding that first VC financings at the end our sample use more US style provisions.23 This interpretation also is suggested by anecdotal evidence. When one of the co-authors collected the data in 2000, he asked one of the VCs why the VC did not use US style contracts. The VC responded that he “did not think it mattered.” Two years later, in early 2002, when the technology market was depressed, the co-author met the VC again. The VC complained that he wanted to exert control in or force a sale of several of his portfolio company investments, but was unable to do so. The VC acknowledged that the contracts did matter. A year later, in 2003, the VC was out of business. From talking to VCs and lawyers, it is our understanding that in 2004 most VC deals in that country use US style contacts. We believe the results have implications for the law and finance literature. The intuitions and predictions of financial contracting theories appear to be valid across different institutional and legal regimes. Based on this, we would expect more convergence toward US style contracts in the future. The results also suggest that it is beneficial for less experienced, local investors to syndicate with and learn from more experienced, multinational investors. One caveat to our results and predictions is that they are based on start-ups largely in developed countries. There are two forces that may favor convergence for these types of firms. First, enforcement of laws is generally not a major problem in most of the countries we study. Second, it may be easier to write desirable contracts for new businesses than for existing ones. The somewhat different results in Lerner and Schoar (2005) for private equity investments in developing countries suggest that either or both of these forces may be important. In fact, our results in conjunction with those of Lerner and Schoar (2005) are consistent with the findings and conjectures in Acemoglu and Johnson (2005). Our results suggest that sophisticated investors contract around existing contracting institutions to implement similar (optimal) contracts for (i) start-ups located in countries in which property rights are enforced and (ii) for start-ups in developing countries with poor property right enforcement that are able to reincorporate in countries in which property rights are enforced. It may be more difficult for more mature companies in developing countries to incorporate elsewhere.24