Syndication Networks and Legal Enforcement

Abstract

This study investigates whether international differences in legal enforcement are associated with venture capital (VC) syndication networks, and whether culture moderates this relationship. We conjecture that public enforcement, with strong investigative powers against any syndicate member and strong group sanctions, increases the costs of VC syndication and discourages the formation of dense syndication networks. By contrast, private enforcement, with strong disclosure and liability standards, encourages the formation of denser VC syndication networks, through clarification of liability rules, standardizing securities contracts, and cost sharing amongst those belonging to the investment syndicate. Based on data from 31 countries involving 201,552 VC-investee firm relationships, the evidence is consistent with the negative impact of public enforcement on VC network density, and partially supports the positive impact of private enforcement depending on cultural conditions.