The interplay of institutional quality and financial development in venture capital fundraising

The paper explores the association between financial development and venture capital fundraising, and how that relationship varies with institutional quality. We analyze a dataset of thirty-one countries between 2005 and 2017 using a dynamic two-step system generalized method of moments (GMM) estimation technique. We find that financial development and its two components, namely financial markets, and financial institutions, exert a significant positive effect on venture capital fundraising. However, the relationship shifts with institutional quality, with positive and large effects in countries with robust legal frameworks but not in those with weak legal frameworks. The results are robust to the use of different data sources and proxies for institutional quality, as well as estimation techniques.