Events

Finance Seminar

Authors:

• Douglas Cumming
  York University

• Bruce Haslem
  Florida State University

• April Knill
  Florida State University

This paper empirically examines the impact of entrepreneurial firm plaintiff litigation on the ability of entrepreneurial firms to obtain venture capital (VC), and the subsequent effect on VC exit outcomes. This empirical context is important, as both the costs of litigation and potential benefits are arguably more pronounced for start-ups relative to established firms. We consider cases of litigation being initiated both before and during VC financing. The data indicate (1) plaintiff firms are more likely to obtain financing by less reputable VCs, (2) VCs provide more oversight of plaintiff firms relative to nonplaintiff firms in their portfolio, (3) and plaintiff firms are more likely to exit by an IPO (versus acquisition), and less likely to be defunct at the end of the investment period. For all results, implications are less severe for litigants who begin their suit after VC suggesting these entrepreneurial litigants have the backing of the VC. Our findings are robust to consideration of two-step Heckman-like treatment regressions for the decision to litigate, and such two-step models actually increase the economic significance of the results.