Determinants and effects of Venture Capital and Private Equity ...

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credit allocated to small business decreases in the long run after mergers, due to more pronounced size change and more complex organizational structure. In light of the above discussion hypothesis on the determinants of venture capital financing can be test. Hypothesis 1: Given the specific setup in which VCs and PEs operate it is possible to identify a cluster of variables which can drive their investment decisions. 3.2 Literature on the economic impact of VCs and PE funds The interest on economic impact of VCs and PE funds can be grouped in two: (1) specific studies addressing the outcomes for the general economy; (2) researches focusing on the performance of the small business after new capital has been acquired. In relation to the first group of studies, Hellman and Puri (2000) and Kortum and Lerner (2000) show that there is a strong positive correlation between venture capital and innovation. More precisely, the formers argue that VC backed firms appear to be faster in implementing new patents; Kortum and Lerner conclude that a dollar of VC is three times more effective in promoting patent creation than a dollar from a corporation. Yet, the direction of causality between Venture Capital and the degree of innovation is an open issue. Some empirical studies have found that more VC financing fosters innovation (“venture capital first hypothesis”, e.g. Kortum and Lerner, 1998), while others document the opposite, meaning that the entrance of the external financer follows the discovery of a new technology and meets the need to market such innovations (“innovation first hypothesis”). Hirukawa and Ueda (2003) find that venture capital financing is more frequent in industries that have had an increase in total factor productivity, which the Authors interpret as a proxy for innovation, while after the deal, this relation turns to be negative. In terms of job creation, research has focused on understanding the relationship between employment growth and VC/PE funding in macroeconomic terms. For example, Wasmer and Weil (2000) find evidence of the impact on employment of an increase in the ration VC investment/GDP in a panel of 20 OECD countries. Belke et al. (2003) extend the scope of the key question testing a virtuous circle between entrepreneurial dynamism, innovative start ups, dynamic venture capital industry and job creation. The paper delivered pioneering empirical evidence of such a link at the macroeconomic level, showing that venture capital is able to significantly raise employment growth and job creation. Focusing on the second field, recent studies examined empirically the relationship between receiving venture capital and firm performance. Sapienza (1992) found that the provided services are positively related to the performance of venture‐backed firms. Most notably, the stylized facts are: (1) the greater the innovation pursued by the venture, the more frequent the - 10 -
contact between the lead investor and the CEO; (2) the more open the communication, and the less conflict of perspective in the venture capitalist‐CEO pair, the greater the value of the involvement. Lerner (1999) evaluates the long run success of firms participating in the Small Business Innovation Research (SBIR) program, a major public assistance initiative in the United States for high‐tech firms. Those receiving assistance from SBIR achieve significantly higher employment and sales growth rates than similar No‐SBIR assisted firms. These differences are even more pronounced in ZIP codes with high venture capital activity. Jain and Kini (1995) add that VCs advice can include marketing services and the upgrading of the commercial network, fostering an increase in sales. Partially in contrast with the above results stands the work of Manigart and Hyfte’s (1999) whose findings for 187 Belgian venture‐backed firms are quite different. Belgian venture‐backed firms do not achieve a significant higher employment growth compared to non‐venture backed firms of the same industries, of similar size, and similar age. However, higher growth rates in total assets and cash flow are obvious. Summarising, many studies have argued and showed that the presence of professional investors can strengthen the performance of a company owing to many different actions they can undertake. Thus, as for the case of Italian small business we can test the following hypothesis: Hypothesis 2: It is possible to determine the enhancing role played by VCs and PE funds when evaluating the post‐investment performances of Italian SMEs. 3.3 Literature on the “Certification Effect” There is a shared acknowledgment of the fact that financial intermediaries can bring positive contributions as agents able to produce information about the qualities of firms. The seminal work of Akerlof (1970) brought the attention to the plausible failures of a market featured by imperfect information. The model predicts that, in the lack of both defined guarantees and distinguishable quality, the market may fail: only the average quality of the goods will be considered, which in turn will have the side effect that goods that are above average in terms of quality will be driven out of the market, causing the “Lemon market”. Using the same framework Chan (1983) shows that when all investors have positive search costs, i.e. they are uninformed investors, the entrepreneurs will find it in their interests to offer less desirable projects leading to the degeneration of the projects undertaken. Thus, only “lemons” are offered and investors will not enter the market. Conversely, when some investors have zero search costs, there is an improved allocation of resources in terms of the entrepreneurs’ efforts spurring projects with higher investor returns. - 11 -
Page 1 and 2: Determinants and effects of Venture
Page 3 and 4: serve larger established companies
Page 5 and 6: 2. SMEs challenging the financial i
Page 7 and 8: after a merger operation, the porti
Page 9: that when size of projects becomes
Page 13 and 14: asymmetric information. On this top
Page 15 and 16: These first arguments already provi
Page 17 and 18: case of turn‐around or buy‐out
Page 19 and 20: described in section 4.1. Finally,
Page 21 and 22: sufficient financial data in the da
Page 23 and 24: equity is 9 per cent; the median ad
Page 25 and 26: Finally, we find Short Debt being n
Page 27 and 28: period of investment and growth. On
Page 29 and 30: An overview of the Sample 50 40 30
Page 31 and 32: Variable Number of Obs. - 31 - Tabl
Page 33 and 34: - 33 -
Page 35 and 36: Variable Age Size Age 1.000 Size 0.
Page 37 and 38: References Aghion P., Bolton P., (1
Page 39 and 40: Gompers P.A., (1995). Optimal stagi
Page 41: Stein J.C., (2002). Information pro

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