1. © Cumming & Johan (2013) Institutional Context and Empirical Methods Institutional Contexts and Empirical Methods Cumming & Johan (2013, Chapter 3) 1

2. © Cumming & Johan (2013) 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. 2

3. © Cumming & Johan (2013) Institutional Context and Empirical Methods 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

4. © Cumming & Johan (2013) 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). 4

5. © Cumming & Johan (2013) Institutional Context and Empirical Methods Legal Conditions Institutional Context Empirical Methods Summary 5 Engli sh Frenc h Germ an Scandinav ian Efficiency of the Judiciary System Rule of Law Corrupti on Risk of Expropriat ion Risk of Contract Repudiati on Legality Index* GNP Per Capita (2005 $US)** Chapter(s) in which data are from country in this book*** Argentina010065.356.025.914.9112.34$4,46013,22 Australia100010 8.529.278.7120.44$33,1209 Austria00109.5108.579.699.620.76$37,1908,13,12,15,21,22 Belgium01009.5108.829.639.4820.82$36,1405,6,8, 13,12,15,21,22 Brazil01005.756.32 7.626.314.09$3,8904,5,13,22 Canada10009.2510 9.678.9621.13$32,590 5,6,9,10,11,13,17,18,19, 20,22 Cayman Islands1000$20,6675,6 China0010$1,74013,22 Czech0010$11,15013,12,15,21,22

6. © Cumming & Johan (2013) Institutional Context and Empirical Methods Legal Conditions Institutional Context Empirical Methods Summary 6 Englis h Frenc h Germa n Scandinavi an Efficiency of the Judiciary System Rule of Law Corrupti on Risk of Expropriat ion Risk of Contract Repudiatio n Legality Index* GNP Per Capita (2005 $US)** Chapter(s) in which data are from country in this book*** Denmark000110 9.679.3121.55$48,3308,13,12,15,21,22 Finland000110 9.679.1521.49$37,5305,6,8,13,22 France010088.989.059.659.1919.67$34,6008,13,12,15,21,22 Germany001099.238.939.99.7720.44$34,8705,6,8,13,12,15,21,22 Greece010076.187.277.126.6214.91$19,8408,13,22 Guatemala$2,40013,22 Hong Kong1000108.228.528.298.8219.11$27,69013,22 Iceland0001$48,5708,13,22 India100084.174.587.756.1112.8$73013,22 Indonesia01002.53.982.157.166.099.16$1,26013,22 Ireland10008.757.88.529.678.9618.92$41,14013,22 Israel1000104.828.338.257.5416.54$18,5809,13,22 Italy01006.758.336.139.359.1717.23$30,2505,6,8,13,12,15,21,22 Japan0010108.988.529.679.6920.36$38,95013,22 Lichtenstein0010$39,4128 Luxembourg0100$68,8105,6 Malaysia100096.787.387.957.4316.67$4,9705,6,13,22

7. © Cumming & Johan (2013) Institutional Context and Empirical Methods Legal Conditions Institutional Context Empirical Methods Summary 7 Englis h Frenc h Germ an Scandinav ian Efficiency of the Judiciary System Rule of Law Corrupti on Risk of Expropriat ion Risk of Contract Repudiatio n Legality Index* GNP Per Capita (2005 $US)** Chapter(s) in which data are from country in this book*** Netherlands010010 9.989.3521.67$39,3405,6,8,13,12,15,21,22 New Zealand100010 9.699.2921.55$25,9205,6 Norway000110 9.889.7121.78$60,8908,13,22 Philippines01004.752.732.925.224.88.51$1,2905,6,13,22 Poland$7,15013,12,15,21,22 Portugal01005.58.687.388.98.5717.2$17,19013,12,15,21,22 Puerto Rico$12,22113,22 Russia$4,47013,22 Singapore1000108.578.229.38.8619.53$26,62013,22 South Africa100064.428.926.887.2714.51$4,8205,6 South Korea0010605.38.318.5914.23$15,88013,22

8. © Cumming & Johan (2013) Institutional Context and Empirical Methods Legal Conditions Institutional Context Empirical Methods Summary 8 Engli sh Frenc h Germ an Scandinav ian Efficiency of the Judiciary System Rule of Law Corrupti on Risk of Expropriat ion Risk of Contract Repudiati on Legality Index* GNP Per Capita (2005 $US)** Chapter(s) in which data are from country in this book*** Spain01006.257.87.389.528.417.13$25,25013,22 Sweden000110 9.49.5821.56$40,9108,13,22 Switzerland001010 9.98 21.91$55,3205,6,8,13,12,15,21,22 Taiwan00106.758.526.859.129.1617.62$16,76413,22 United Kingdom 1000108.579.19.719.6320.41$37,7505,6,8,11,13,22 United States100010 8.639.98920.85$43,560 4,5,6,7,8,9,10,11,12,13, 16,18,20,22 * 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 4 and 8 consider regions for Asia, Pan-Europe, and Rest of World, without identifying particular countries

9. © Cumming & Johan (2013) 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 9

10. © Cumming & Johan (2013) 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 10

11. © Cumming & Johan (2013) 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 11

12. © Cumming & Johan (2013) 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 12

13. © Cumming & Johan (2013) 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 13

14. © Cumming & Johan (2013) 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 14

15. © Cumming & Johan (2013) 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 15

16. © Cumming & Johan (2013) 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 16