For legal institutions (i.e., English, French, or Socialist), the results are surprising. For direct investments, socialist legal origins predict higher returns at all percentiles. Surprisingly, British legal origins predict lower returns on average and at the 50th, 75th and 90th percentiles, though the association is not statistically significant. For fund investments, socialist legal origins again predict positive returns. British legal origins predict positive returns, but the effect is not statistically significant. These results contrast with those of Lerner and Schoar (2005) who find private equity returns and valuations to be higher in economies with British legal origins and lower in those with socialist legal origins, although their sample is much smaller than ours in terms of the number of countries included. One explanation for higher returns in socialist legal origin countries could be that returns are available in these countries from correcting a (mis)allocation of capital to lower return investments under socialist governments, for instance through privatization.

**Differences from perceived political risk, corruption and economic freedom.** Table 7 includes in Equation (1) other country risk factors—political risk, corruption perception, and economic freedom—that in contrast to the variables in Table 6, are available only for recent years. Generally, the associations with these variables are not precisely estimated, given the much smaller sample. In Table 7, Panel A there is some evidence that corruption perception is associated with better performance of direct investments at the 50th, 75th and 90th percentiles, whereas economic freedom and political risk are associated with lower returns at the top of the distribution.<sup>20</sup> Johan and Zang (2016) do not observe returns, but find exits, which may be a proxy for profit, are more likely in countries with greater perceived corruption.

These results are consistent with the findings in Table 6. One way to rationalize the results so far is that misallocation of capital in an economy, for instance driven by socialist legal origins or corruption, creates profit opportunities for private equity investors in emerging markets. In contrast, investees in economically “freer” countries are less capital constrained, and so have lower returns. Yet, other factors, such as political risk, can harm returns.

**Differences from financial openness and development.** We investigate this misallocation hypothesis further by including in Equation (1) measures of financial openness and development that more directly capture access to capital, and the potential for misallocation due to capital constraints. The financial openness index from Chinn and Ito (2006) captures de-jure capital controls and private sector credit as a percent of GDP captures the depth of the banking sector. In this regression, we also include country fixed effects, to isolate variation within countries as these variables change over time, for instance those associated with liberalizing reforms. Table 8 reports these results.

For direct investments, in Table 8, Panel A, the OLS specification shows a negative association between both variables and performance, indicating that as financial markets open and credit mar-

> 20Table A8 reports results using the IRR as measure of performance. Table A9 reports results when restricting the sample to only realized investments. Results are qualitatively similar.

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