Academics’ Paper Published on “Venture Capital Experts” Website
Dr Richard Fairchild, from the School of Management, and visiting scholar Dr Yiyuan Mai, from Huazhong University for Science and Technology, Wuhan, China, have had their paper, ‘"The Effect of the Legal System and Empathy in Venture Capital Contacting: Theory and Evidence”, published on the Venture Capital Experts website.
The VC Experts website serves the needs of the private equity and venture capital communities by combining substantive commentary on the private equity and venture capital industries with online learning courses. The site includes current industry news, weekly commentary, an online university and a 6,000 page encyclopedia of private equity and venture capital.
The paper, which initially appeared in the School’s Working Paper Series, employs psychological game theory to examine the relationship between a society's legal system, the strength of venture capital contracts, and venture performance and poses questions such as: does the venture capital sector require a strong legal system in order to flourish, or can it survive based upon implicit relationships such as empathy? How does the strength of the legal system affect the optimality of tough or weak contracts? It addresses these issues by developing a double-sided moral hazard model of venture capital financial contracting, featuring both agency problems and empathy between the venture capitalist and the entrepreneur. The paper then addresses these issues by considering responses from a questionnaire of Chinese Venture Capitalists.
Richard comments; “This is a fascinating area of research. It has been recognized for some time that the entrepreneur-venture capital relationship embodies incentive problems for both parties. Now we are beginning to understand that behavioural factors, such as fairness, empathy and trust, may also affect venture capital performance. The challenge is to incorporate these factors into a formal behavioural game-theoretic model”.
Yiyuan comments; “China is one of the world’s fastest growing economies and attracts more and more foreign capital inflows. In order to further understand the combined effects of the legal system and Chinese culture on the venture capitalists’ view of the optimality of tough or soft contracts, we surveyed some major Chinese venture capitalists. It provided the first steps in applying our research into the venture capital investment decision under different cultures and legal backgrounds”.
The paper is available under subscription on the VC Experts website.
Note to Editors
The VC Experts Encyclopedia of Private Equity and Venture Capital is a complete online compendium on all aspects of private equity and venture capital, as well as an interactive community for professionals in the space. The Encyclopedia features content by Chief Editor Joe Bartlett, as well as a team of over 85 Contributing Editors from various professional firms who add their knowledge to the system. The online university houses online classes and streaming video presentations that are targeted to practitioners in the PE and VC communities.
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