Misconduct Risks, Legal Enforcement, and Venture Capital Networks

Abstract

This study investigates the differing role of enforcement on the formation of venture capital
(VC) syndication networks. We conjecture that public enforcement, with strong investigative
powers against any syndicate member, discourages the formation of denser syndication
networks due to misconduct risk by a member. By contrast, private enforcement, with strong
disclosure and liability standards, enables denser syndication networks, through clear liability
rules, standardized securities contracts, and cost sharing amongst syndicate members. Our VC data from 31 countries show a negative impact of public enforcement on VC networks, and partially support the positive impact of private enforcement depending on cultural conditions.

Keywords: Networks, Venture Capital, Syndication, Legal Enforcement, Culture

JEL Classification: G24, G32