Creditor Protection Law Effects on Venture Capital Investment in Africa: Country-Level Evidence

Abstract

This article examines variation in creditor protection laws to empirically investigate their effect on country-level venture capital investment in Africa. Results, using bank branch density as an instrumental variable, indicate that stronger creditor protection laws have significantly positive effects on seed, start-up, and early and expansion venture capital investments. In addition, the magnitude of such effects on investment at both venture capital stages is relatively larger than the effects on private equity investment. This supports the theory that the effects of a shock to financially constrained companies in imperfect financial markets are magnified when information asymmetry is more severe.