Chapter 3

© Cumming & Johan (2009) Institutional Context and Empirical Methods

Institutional Contexts and Empirical Methods

Cumming & Johan (2009, Chapter 3)

1


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.

2


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.

3


Legal Conditions


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).

4


Legal Conditions


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 $32,5905,6,9,10,11,12,13,17,

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 5


Legal Conditions


Empirical Methods

Summary

6

Eng-lish

Fre-nch

Ger-man

Scand-inavian

Efficiency of the

Judiciary System

Rule of

Law

Corr-uption



Legality Index*


$US)**


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


Legal Conditions


Empirical Methods

Summary

7

Eng-lish

Fre-nch

Ger-man

Scand-inavian

Efficiency of the

Judiciary System

Rule of

Law

Corr-uption


Risk of Contract

Repudiation

Legality Index*


$US)**


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


Legal Conditions


Empirical Methods

Summary

8

Eng-lish

Fre-nch

Ger-man

Scand-inavian

Efficiency of the

Judiciary System

Rule of

Law

Corr-uption

Risk of Expropriat

ion


Legality Index*


$US)**


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 $43,5605,6,7,8,9,10,11,12,13

,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


Empirical Methods


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

9


Empirical Methods


Empirical Methods

Summary

• Steps in analyzing data– Representativeness– Descriptive statistics– Comparison tests and correlations– Regression analyses– Robustness checks

10


Steps in Analyzing Data


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

11




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

12




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

13




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

14




Empirical Methods

Summary

• Robustness checks– Specification mistakes

• Omitted variables• Endogeneity• Heteroskedasticity• Selection effects• Clustering• Outliers

15


Summary


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

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Chapter 3

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