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

These first arguments already provide some indications on which variables can be chosen
for our purpose. In the empirical analysis of the determinants of venture capital, we use the
logarithm of firm sales (Size) as a proxy for company size. Age (in logarithm) is calculated using
the date of incorporation of the firm. Finally, we use Intangibles, defined as the share of
intangible over the sum of intangible and tangible assets, to proxy for the difficulty of external
investors in evaluating the activity of the firm. In particular, the variables as Size and Age have
an expected negative sign on the probability of VC and PE finance, meaning the lower the age
and the size, the higher the probability. On the contrary, we expect higher rate of Intangibles
associated to backed firms. Information asymmetry also involves the decision upon the choice
between internal and external capital: negating the hypothesis of frictionless financial markets,
as set by Modigliani and Miller (1958), inefficient equilibria arise. As a consequence, firms
adhere to a ‘pecking order’ in financing their investments (Myers and Majluf, 1984): they first
rely on internal capital, which is the source of financing with the lowest opportunity cost; then,
when internal capital is exhausted, they turn to the external capital source with the lowest cost,
which is usually debt (at least for firms with low leverage). However, as we have already
discussed, SMEs and, in particular, the innovative ones have peculiar characteristics which bring
Sau (2008) to renew the “pecking order” theory allowing venture capital to precede debt
financing. On this basis we introduce the variables Leverage and Short debt (in logarithm)
respectively defined as the share of debt over the sum of debt and equity and overall amount
of short‐term debt granted to the company both in terms of commercial and financial debt. As
in the case for Age and Size, for the same reasons, we expect a negative sign.
Profitability and performance of the firm are other figures an investor may be interested in,
although the evaluation of such deals is usually take into consideration the perspectives of
future earnings. In consideration of the latter, we elect to plug in ROE as fundamental measure
of profitability. In this case, making any predictions on the sign is a difficult task, since
conflicting interpretations coexist a priori: on the one hand, an high value may convey
reassuring information on future returns to investors; on the other hand, it might be perceived
as abundance of internal resources which is negatively related with the probability of venture
financing. Furthermore, Ebitda proxies for performance. Provided that it gives insights on the
ability of the firm to generate cash flows from the core activity, higher values are expected to
rise the probability of financing.
Finally, from the strand of research which tries to find connections between VC and PE
financing and the degree of innovation, both at aggregate and individual level, we identify
Growth, defined as the rate of change of sales for each company, Capex, defined as the rate of
change of fixed assets which proxies for firm investment, and the High‐Tech dummy, which
takes the value 1 in industries with a high “innovative” content 7 , as additional variables of
7 Using the four‐digit industry codes, we classify a firm to be a high‐technology one if it belongs to one of the
following industries: chemical and pharmaceutical products, aerospace, electronic equipment, media,
telecommunications, software and hardware.
- 15 -