Venture Capital and Corporate Governance by Franklin Allen, Wei-ling Song

Section: The Role of Corporate Governance

TL;DR - Creditor rights and rule of law influence the level of VC activity.

Helpfulness - 3

Tags - governance, venture capital, creditor rights, rule of law, GDP

Questions answered:

  • What variables influence the level of VC activity?


  • Direct governance structures between investors and VCs and between VC and portfolio companies are not publicly available.
  • Creditor rights and the rule of law are significant determinants of levels of VC activity across countries.
  • As suggested by empirical studies, economic growth, financial development, governance and investor protection are correlated.
  • A well-developed stock market increases the chance of a successful exit (IPO).
  • Because VC claims more closely resemble creditor claims than equity claims, creditor protection is more important for VC activities than rule of law.
  • Economic development, measured by GDP per capita, is positively correlated with the level of VC investments.
  • Indicators:
    • Higher past real GDP growth encourages more early stage investment.
    • Larger market capitalization as a percentage of GDP encourages more later stage investment since the exit channel becomes more important for later stages.
    • Better creditor protection is associated with a higher percentage of funds allocated to the medical and biotechnology industry.
    • Higher GDP per capita and past real GDP growth are associated with higher allocation to High-Tech industry.
    • Lower GDP per capita is associated with higher allocation to Non-Tech industries.

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