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  • 1. Institutional Contexts and Empirical Methods
    • Cumming & Johan (2009, Chapter 3)
  • 2. Chapter Objectives
    • Provide an overview of the legal and institutional context considered in the different countries studied in the ensuing chapters of this book.
    • Review basic statistical and econometric methods for empirically studying venture capital and private equity markets.
  • 3. Institutional Context
    • Institutional Context
    • Empirical Methods
    • Summary
    • Differences in venture capital and private equity markets might be attributable to a variety factors, such as
      • Law, such as legal origin (English, French, German, Scandinavian), as well as the degree to which a country’s courts adhere to the rule of law and the efficiency of courts.
      • Culture, such as differences in the stigma attached to going bankrupt or the extent to which people trust one another.
      • Economic conditions, such as GNP per capita or the size of a country’s stock market.
  • 4. Legal Conditions
    • Institutional Context
    • Empirical Methods
    • Summary
    • Common measures of law quality include
      • Common law (English Legal Origin) versus Civil Law (French, German, Scandinavian Legal Origin)
      • Efficiency of the judicial system (the efficiency and integrity of the legal environment)
      • The rule of law (the assessment of the law and order tradition in the country)
      • Corruption (the extent of government corruption in a country)
      • Risk of expropriation (the risk of outright confiscation or forced nationalization)
      • Risk of contract repudiation (the risk of contract modification).
  • 5. Legal Conditions
    • Institutional Context
    • Empirical Methods
    • Summary
      Eng-lish Fre-nch Ger-man Scand-inavian Efficiency of the Judiciary System Rule of Law Corr-uption Risk of Exprop-riation Risk of Contract Repud-iation Legality Index* GNP Per Capita (2005 $US)** Chapter(s) in which data are from country in this book*** Argentina 0 1 0 0 6 5.35 6.02 5.91 4.91 12.34 $4,460 22 Australia 1 0 0 0 10 10 8.52 9.27 8.71 20.44 $33,120 9 Austria 0 0 1 0 9.5 10 8.57 9.69 9.6 20.76 $37,190 14,16,21,22 Belgium 0 1 0 0 9.5 10 8.82 9.63 9.48 20.82 $36,140 5,6,14,16,21,22 Brazil 0 1 0 0 5.75 6.32 6.32 7.62 6.3 14.09 $3,890 4,5,22 Canada 1 0 0 0 9.25 10 10 9.67 8.96 21.13 $32,590 5,6,9,10,11,12,13,17,18,19,22 Cayman Islands 1 0 0 0 $20,667 5,6 China 0 0 1 0 $1,740 22 Czech 0 0 1 0 $11,150 14,16,21,22
  • 6. Legal Conditions
    • Institutional Context
    • Empirical Methods
    • Summary
      Eng-lish Fre-nch Ger-man Scand-inavian Efficiency of the Judiciary System Rule of Law Corr-uption Risk of Exprop-riation Risk of Contract Repud-iation Legality Index* GNP Per Capita (2005 $US)** Chapter(s) in which data are from country in this book*** Denmark 0 0 0 1 10 10 10 9.67 9.31 21.55 $48,330 14,16,21,22 Finland 0 0 0 1 10 10 10 9.67 9.15 21.49 $37,530 5,6,22 France 0 1 0 0 8 8.98 9.05 9.65 9.19 19.67 $34,600 14,16,21,22 Germany 0 0 1 0 9 9.23 8.93 9.9 9.77 20.44 $34,870 5,6,14,16,21,22 Greece 0 1 0 0 7 6.18 7.27 7.12 6.62 14.91 $19,840 22 Guatemala $2,400 22 Hong Kong 1 0 0 0 10 8.22 8.52 8.29 8.82 19.11 $27,690 22 Iceland 0 0 0 1 $48,570 22 India 1 0 0 0 8 4.17 4.58 7.75 6.11 12.8 $730 22 Indonesia 0 1 0 0 2.5 3.98 2.15 7.16 6.09 9.16 $1,260 22 Ireland 1 0 0 0 8.75 7.8 8.52 9.67 8.96 18.92 $41,140 22 Israel 1 0 0 0 10 4.82 8.33 8.25 7.54 16.54 $18,580 9,22 Italy 0 1 0 0 6.75 8.33 6.13 9.35 9.17 17.23 $30,250 5,6,14,16,21,22 Japan 0 0 1 0 10 8.98 8.52 9.67 9.69 20.36 $38,950 22 Luxembourg 0 1 0 0 $68,810 5,6 Malaysia 1 0 0 0 9 6.78 7.38 7.95 7.43 16.67 $4,970 5,6,22
  • 7. Legal Conditions
    • Institutional Context
    • Empirical Methods
    • Summary
      Eng-lish Fre-nch Ger-man Scand-inavian Efficiency of the Judiciary System Rule of Law Corr-uption Risk of Exprop-riation Risk of Contract Repudiation Legality Index* GNP Per Capita (2005 $US)** Chapter(s) in which data are from country in this book*** Netherlands 0 1 0 0 10 10 10 9.98 9.35 21.67 $39,340 5,6,7,8,14,16,21,22 New Zealand 1 0 0 0 10 10 10 9.69 9.29 21.55 $25,920 5,6 Norway 0 0 0 1 10 10 10 9.88 9.71 21.78 $60,890 22 Philippines 0 1 0 0 4.75 2.73 2.92 5.22 4.8 8.51 $1,290 5,6,22 Poland $7,150 14,16,21,22 Portugal 0 1 0 0 5.5 8.68 7.38 8.9 8.57 17.2 $17,190 14,16,21,22 Puerto Rico $12,221 22 Russia $4,470 22 Singapore 1 0 0 0 10 8.57 8.22 9.3 8.86 19.53 $26,620 22 South Africa 1 0 0 0 6 4.42 8.92 6.88 7.27 14.51 $4,820 5,6 South Korea 0 0 1 0 6 0 5.3 8.31 8.59 14.23 $15,880 22
  • 8. Legal Conditions
    • Institutional Context
    • Empirical Methods
    • Summary
      Eng-lish Fre-nch Ger-man Scand-inavian Efficiency of the Judiciary System Rule of Law Corr-uption Risk of Expropriation Risk of Contract Repud-iation Legality Index* GNP Per Capita (2005 $US)** Chapter(s) in which data are from country in this book*** Spain 0 1 0 0 6.25 7.8 7.38 9.52 8.4 17.13 $25,250 22 Sweden 0 0 0 1 10 10 10 9.4 9.58 21.56 $40,910 22 Switzerland 0 0 1 0 10 10 10 9.98 9.98 21.91 $55,320 5,6,14,16,21,22 Taiwan 0 0 1 0 6.75 8.52 6.85 9.12 9.16 17.62 $16,764 22 United Kingdom 1 0 0 0 10 8.57 9.1 9.71 9.63 20.41 $37,750 5,6,22 United States 1 0 0 0 10 10 8.63 9.98 9 20.85 $43,560 5,6,7,8,9,10,11,12,13,22 * Legality = .381* (Efficiency of the Judiciary) + .5778* (Rule of Law) + .5031* (Corruption) + .3468* (Risk of Expropriation) + .3842* (Risk of Contract Repudiation) ; Berkowitz et al. (2003). Legal indices are not available for some countries. ** Source: World Bank Development Indicators 2007. *** In addition to The Netherlands and the US, Chapters 7 and 8 consider regions for Asia, Europe outside Netherlands, and Rest of World, without identifying particular countries
  • 9. Empirical Methods
    • Institutional Context
    • Empirical Methods
    • Summary
    • Data analyses versus case study analyses
      • Data useful to understand what happens in practice
      • Large samples from multitude of countries
        • Focus on a single country could give rise to inappropriate inferences
        • E.g., just looking at U.S. data would give rise to misleading inferences about financial contracting in venture capital
      • Focus on data analysis in this book as it is even more difficult to draw generalizable lessons from case analyses
      • Case studies can be used to complement analyses in this book to consider examples and decision making processes
  • 10. Empirical Methods
    • Institutional Context
    • Empirical Methods
    • Summary
    • Steps in analyzing data
      • Representativeness
      • Descriptive statistics
      • Comparison tests and correlations
      • Regression analyses
      • Robustness checks
  • 11. Steps in Analyzing Data
    • Institutional Context
    • Empirical Methods
    • Summary
    • Representativeness
      • Compare sample to population
      • Important for reliability
      • But sometimes difficult as the population is unknown, or characteristics about the population are unknown
        • VC and PE funds are not obliged to report
  • 12. Steps in Analyzing Data
    • Institutional Context
    • Empirical Methods
    • Summary
    • Descriptive statistics
      • Means, medians, standard deviation, minimum, maximum
      • Useful to understand characteristics of variables in data
        • E.g., important for understanding economic significance of factors that influence variables in the data
  • 13. Steps in Analyzing Data
    • Institutional Context
    • Empirical Methods
    • Summary
    • Comparison tests and correlations
      • Important for understanding patters in the data
      • Also, can be used to catch misspecification errors in regression analyses
  • 14. Steps in Analyzing Data
    • Institutional Context
    • Empirical Methods
    • Summary
    • Regression analyses
      • Control for other things being equal
      • Methods depend on type of variable to explain
        • Ordinary least squares
        • Tobit
        • Box-Cox
        • Logit/Probit
        • Ordered Logit
        • Multinomial Logit
  • 15. Steps in Analyzing Data
    • Institutional Context
    • Empirical Methods
    • Summary
    • Robustness checks
      • Specification mistakes
        • Omitted variables
        • Endogeneity
        • Heteroskedasticity
        • Selection effects
        • Clustering
        • Outliers
  • 16. Summary
    • Institutional Context
    • Empirical Methods
    • Summary
    • International institutional context empirically considered in the ensuing chapters
      • Reference to legal and institutional differences across countries
      • Background in terms of both the theory and the empirical methods is important for following each of the remaining chapters herein
    • Brief review of the statistical and econometric techniques used in the ensuing chapters
      • Examine data so that readers are familiar with venture capital and private equity contracting in the real world, and not just from a theoretical lens
      • Analyses of large datasets enable generalizable insights, unlike studying one-off cases