Law, Finance, and Venture Capitalists' Asset Allocation Decisions

55 Pages Posted: 28 Jun 2004

Date Written: December 30, 2004

Abstract

In this paper, I find that excess demand for external financing in poor quality legal environments is particular to early stage or low collateral value ventures. However, excess demand for external financing from early stage non-technology intensive ventures is greater relative to that from early stage technology intensive ventures. I also find that the supply response by venture capitalists is sensitive to the level of excess demand for external financing. Later stage ventures in poor quality legal environments are not characterized by excess demand for external financing. Furthermore, later stage non-technology intensive ventures in poor quality contract enforcement environments are characterized by sub-optimal demand for venture capital financing. A structural model indicates that as the quality of the legal environment deteriorates, and moral hazard problems increase, equity becomes a more efficient security for financing small firms relative to debt instruments.

Keywords: Venture Capital, International Finance

Suggested Citation

Obrimah, Oghenovo A., Law, Finance, and Venture Capitalists' Asset Allocation Decisions (December 30, 2004). Available at SSRN: https://ssrn.com/abstract=558581 or http://dx.doi.org/10.2139/ssrn.558581

Oghenovo A. Obrimah (Contact Author)

FISK University ( email )

1000 17th Ave N
Nashville, TN TN 37208-3051
United States
4049404990 (Phone)

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