Legitimacy Signals and Investor Protections: Top-Tier Law Firms in Global Venture Capital Investments

Abstract

Venture capital (VC) transactions are impeded by two frictions: entrepreneurs cannot credibly signal quality to investors, and investors cannot fully protect themselves against governance risks in incomplete–contract relationships. We argue that top-tier law firms address both frictions: sell-side firms through signaling that reduces legitimacy deficits, buy-side firms through contractual expertise that protects investor interests. Using 71,129 global VC deals from 2005 to 2020, we find that top-tier law firm involvement is associated with higher ownership stakes, valuations, returns, and exit success. Both mechanisms are stronger in weaker legal environments. Results are robust to multiple identification strategies.