How Do Legal Differences and Learning Affect Financial Contracts?

In order to determine whether the financial contractsobserved in the United States are optimal in other institutional environments,venture capital contracts in twenty-three international companies are comparedto those in the United States. The sample included 145 investments in 107companies in 23 countries by 70 different leading venture capitalists(VCs). Each VC was asked to provide investment information, including the company'sbusiness plan and his or her own internal analysis of the investment. Theanalysis reveals that contracts differ significantly across legal regimes. Morespecifically, investments in common law countries are more likely to resembleU.S. contracts, while investments elsewhere are likely to differ. More experienced VCs are likely to implement U.S.-style contracts regardlessof legal regime. Furthermore, VCs who use U.S.-style contracts are less likelyto fail than those who do not. Taken together, the results suggest thatU.S.-style contracts are indeed optimal across a wide range of legalregimes. The tendency of experienced VCs to rely on them may be attributed to thefact that contracts in the United States have developed over several businesscycles and are effective. It is reasonable to expect more convergence towardU.S.-style contracts in the future. (SAA)