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Legal Protection, Corruption and Private Equity Returns in Asia

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Entrepreneurship, Governance and Ethics

Abstract

This article examines how private equity returns in Asia are related to levels of legal protection and corruption. We utilize a unique data set comprising over 750 returns to private equity transactions across 20 developing and developed countries in Asia. The data indicate that legal protections are an important determinant of private equity returns in Asia, but also that private equity managers are able to mitigate the potential for corruption. The quality of legal system (including legal protections) is positively related to returns. Inefficient legal protections negatively impact transaction structures and economic certainty when exiting investments. We also find that private equity managers, irrespective of the quality of legal system they are operating within, can mitigate the potential impact of corruption. Private equity returns are higher in countries with higher levels of corruption, controlling for legal systems. This finding is consistent with the view that private equity managers bring about organizational change to alleviate the costs of corruption. Our findings are robust to inclusion of controls for Hofstede cultural variables, economic conditions, and transaction specific characteristics, as well as consideration of econometric sample selection methods for unexited investments.

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Author information

Authors and Affiliations

  1. York University Schulich School of Business, Toronto, ON, M3J 1P3, Canada

    Douglas Cumming

  2. Continuity Capital Partners, Level 8, 12 Moore Street, Canberra, ACT, 2601, Australia

    Grant Fleming

  3. School of Finance, Actuarial Studies & Applied Statistics, College of Business and Economics, Australian National University, Canberra, ACT, 0200, Australia

    Grant Fleming

  4. Tilburg Law and Economics Center, Postbus 90153, Tilburg, 5000 LE, The Netherlands

    Sofia Johan

  5. Wilshire Private Markets, Wilshire Japan K.K., 4th Floor, East Tower, Otemachi First Square, 1-5-1 Otemachi, Chiyoda-ku, Tokyo, 100-0004, Japan

    Mai Takeuchi

Authors
  1. Douglas Cumming
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  2. Grant Fleming
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  3. Sofia Johan
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  4. Mai Takeuchi
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Corresponding author

Correspondence to Sofia Johan .

Editor information

Editors and Affiliations

  1. University of Birmingham, School of Business, Edgbaston Road, B15 2TY, Birmingham, United Kingdom

    Robert Cressy

  2. York University, Schulich School of Business, Keele Street, 4700, M3J 1P3, Toronto, Ontario, Canada

    Douglas Cumming

  3. University of Birmingham, Birmingham Business School, Edgbaston Park Rd., B15 2TT, Birmingham, United Kingdom

    Christine Mallin

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Cumming, D., Fleming, G., Johan, S., Takeuchi, M. (2012). Legal Protection, Corruption and Private Equity Returns in Asia. In: Cressy, R., Cumming, D., Mallin, C. (eds) Entrepreneurship, Governance and Ethics. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-2926-1_4

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