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

Hypothesis 3:
There is a positive relationship between the VC funding and the overall perception of
stakeholders, captured by such economic variables as interest costs to total debt, trade
credit and access to institutional credit.
4. Theory and evidence on the role of VC and PE
We have seen from section 3 that there is not a single theory that by itself is able to explain
the rationale of venture capital and private equity contracts. Hence, in this part we try to draw
on corporate finance theories and previous empirical evidence hints for identifying a list of
controls which will help addressing the hypothesis moved and their relations.
4.1 The Determinants
When testing for the determinants of VC and PE financing specifically addressed to SMEs
firms, a first step implies understanding what are their main characteristics and which of them
are eligible to play a relevant role in the investment decision. Therefore, the purpose of this
section, along with the theoretical predictions found in the literature, is to present a set a
variables which might be perceived suitable for our analysis.
In the field of economic research, it’s a common practice to use firms’ youth and size as
proxies for informational opaqueness 6 , making a link with the two major outcomes of the well‐
known asymmetric information theory: “adverse selection” and “moral hazard”. Both of them
may arise in any investment environment, but they seem particularly acute in the
entrepreneurial finance. With large established firms, investments are made safer by the use of
existing assets as collateral, and the development of reputation. Collateral and reputation
effects can mitigate the negative effects of both adverse selection and moral hazard. Because
entrepreneurial firms lack assets to provide as collateral, and because they lack the “track
record” necessary to establish their reputation, the effects of informational market failures are
more severe in entrepreneurial finance than in financing established firms. Moreover, the
degree of asymmetric information is also likely to be high for firms whose assets are difficult to
evaluate, such as those whose main asset is a new product yet to be launched on the market or
those with a large share of intangible assets in their balance sheets. Thus, not surprisingly, the
financial literature contends that because of their superior scouting and monitoring capabilities,
VC and PE investors are able to deal effectively with the adverse selection and moral hazards
problems.
6 Cfr. Bertoni, Colombo and Croce (2008) for a review.
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