© Cumming & Johan (2009) Institutional Context and Empirical Methods
Institutional Contexts and Empirical Methods
Cumming & Johan (2009, Chapter 3)
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© Cumming & Johan (2009) Institutional Context and Empirical Methods
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.
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© Cumming & Johan (2009) Institutional Context and Empirical Methods
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.
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© Cumming & Johan (2009) Institutional Context and Empirical Methods
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).
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© Cumming & Johan (2009) Institutional Context and Empirical Methods
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 $32,5905,6,9,10,11,12,13,17,
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
© Cumming & Johan (2009) Institutional Context and Empirical Methods
Legal Conditions
Institutional Context
Empirical Methods
Summary
6
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
© Cumming & Johan (2009) Institutional Context and Empirical Methods
Legal Conditions
Institutional Context
Empirical Methods
Summary
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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
© Cumming & Johan (2009) Institutional Context and Empirical Methods
Legal Conditions
Institutional Context
Empirical Methods
Summary
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Eng-lish
Fre-nch
Ger-man
Scand-inavian
Efficiency of the
Judiciary System
Rule of
Law
Corr-uption
Risk of Expropriat
ion
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 $43,5605,6,7,8,9,10,11,12,13
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* 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
© Cumming & Johan (2009) Institutional Context and Empirical Methods
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
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© Cumming & Johan (2009) Institutional Context and Empirical Methods
Empirical Methods
Institutional Context
Empirical Methods
Summary
• Steps in analyzing data– Representativeness– Descriptive statistics– Comparison tests and correlations– Regression analyses– Robustness checks
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© Cumming & Johan (2009) Institutional Context and Empirical Methods
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
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© Cumming & Johan (2009) Institutional Context and Empirical Methods
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
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© Cumming & Johan (2009) Institutional Context and Empirical Methods
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
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© Cumming & Johan (2009) Institutional Context and Empirical Methods
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
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© Cumming & Johan (2009) Institutional Context and Empirical Methods
Steps in Analyzing Data
Institutional Context
Empirical Methods
Summary
• Robustness checks– Specification mistakes
• Omitted variables• Endogeneity• Heteroskedasticity• Selection effects• Clustering• Outliers
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© Cumming & Johan (2009) Institutional Context and Empirical Methods
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
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