ABSTRACT
This paper examines how legal systems shape contractual investor protection by using a distinctive feature of China’s venture capital (VC) market, where investments are structured either through offshore entities governed by common law or through onshore entities subject to domestic civil law. This institutional duality generates substantial within-market variation in legal origin under a shared economic environment, providing empirical leverage to study how statutory legal regimes interact with private contracting. Using granular contract-level data, we construct a novel investor protection index and document that common-law deals adopt significantly stronger protective terms than civil-law deals, consistent with complementarity between statutory and contractual investor protection. However, this relationship changes under heightened economic uncertainty. While VC contracts generally become more protective when uncertainty rises, the increase in contractual protection is significantly weaker for common-law structures, suggesting that stronger legal institutions partially substitute for explicit contractual safeguards in risky environments. The substitution effect extends to the supply side of VC investment, where common-law governance reduces reliance on investor experience in managing uncertainty, but does not replace demand-side bargaining power of entrepreneurial firms. We further corroborate our results using large language model (LLM)-based measures that provide a holistic, context-aware assessment of investor protection.
Lin, Chen and Liu, Yu-Jane and Wei, Lai and Wen, Dan and Ye, Yusheng, Investor Protection in Venture Capital: How Do Legal Systems Shape Contracting? (August 3, 2025).
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