This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

Law and Finance

This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common-law countries generally have the strongest, and Frenchcivil-law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

This paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

A Survey of Corporate Governance

This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. CORPORATE GOVERNANCE DEALS WITH the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers? At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward. The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they sometimes do, usually they do not. Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance. But this does not imply that they have solved the corporate governance problem perfectly, or that the corporate governance mechanisms cannot be improved. In fact, the subject of corporate governance is of enormous practical impor

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Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increasing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy.

https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1540-6261.1993.tb04022.x

The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems

No. This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Fazzari, Hubbard, and Petersen as having unusually high investment-cash flow sensitivities. We find that firms that appear less financially constrained exhibit significantly greater sensitivities than firms that appear more financially constrained. We find this pattern for the entire sample period, subperiods, and individual years. These results (and simple theoretical arguments) suggest that higher sensitivities cannot be interpreted as evidence that firms are more financially constrained. These findings call into question the interpretation of most previous research that uses this methodology.

/pdf/do-investment-cash-flow-sensitivities-provide-useful-1r9f5xtfzn.pdf

Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?

In this paper, we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory. We do so by conducting a detailed study of actual contracts between venture capitalists (VCs) and entrepreneurs. We consider VCs to be the real world entities who most closely approximate the investors of theory. (1) The distinguishing characteristic of VC financings is that they allow VCs to separately allocate cash flow rights, voting rights, board rights, liquidation rights, and other control rights. We explicitly measure and report the allocation of these rights. (2) While convertible securities are used most frequently, VCs also implement a similar allocation of rights using combinations of multiple classes of common stock and straight preferred stock. (3) Cash flow rights, voting rights, control rights, and future financings are frequently contingent on observable measures of financial and non-financial performance. (4) If the company performs poorly, the VCs obtain full control. As company performance improves, the entrepreneur retains / obtains more control rights. If the company performs very well, the VCs retain their cash flow rights, but relinquish most of their control and liquidation rights. The entrepreneur's cash flow rights also increase with firm performance. (5) It is common for VCs to include non-compete and vesting provisions aimed at mitigating the potential hold-up problem between the entrepreneur and the investor. We interpret our results in relation to existing financial contracting theories. The contracts we observe are most consistent with the theoretical work of Aghion and Bolton (1992) and Dewatripont and Tirole (1994). They also are consistent with screening theories.

/pdf/financial-contracting-theory-meets-the-real-world-an-2rys76bh9g.pdf

Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts

The effects of management buyouts on operating performance and value

We compare the characteristics of real world financial contracts to their counterparts in financial contracting theory. We do so by studying the actual contracts between venture capitalists (VCs) and entrepreneurs. The distinguishing characteristic of VC financings is that they allow VCs to separately allocate cash flow rights, board rights, voting rights, liquidation rights and other control rights. We describe and measure these rights. We then interpret our results in relation to existing financial contracting theories. We also describe the interrelation and the evolution across financing rounds of the different rights. Query 1 Query 2

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This paper investigates the performance and capital inflows of private equity partnerships. Average fund returns (net of fees) approximately equal the SP however, established funds are less sensitive to cycles than new entrants. Several of these results differ markedly from those for mutual funds. THE PRIVATE EQUITY INDUSTRY, primarily venture capital (VC) and buyout (LBO)

/pdf/private-equity-performance-returns-persistence-and-capital-3411y0a3ph.pdf

Steven N. Kaplan

Papers

Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?

Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts

The effects of management buyouts on operating performance and value

Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts

Private Equity Performance: Returns, Persistence, and Capital Flows