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

described in section 4.1. Finally, Year includes the years when the deal took place and controls
for specific common effects.
4.3.2 The econometric set‐up for the effects
In this section we present the procedure adopted to analyze the performance – in terms of
various balance sheet indicators – of backed firms relative to the companies that did not
receive this form of financing.
For the main accounting and financial variables (denoted yi,t) we estimate the following
fixed‐effect regression:
yi,t = α +β1Deal0 + β2Deal13 + ut + dt + εi,t
Where Deal0 is a dummy variable which takes value 1 in the year of the deal. It should be
pointed out that if the firm is financed more than once in our sample period, the dummy takes
value 1 more than once, specifically in the year of each operation. Deal 13 is a dummy equal to
1 in the three years after the deals, which is considered the average holding period for the
industry.
Regarding the estimation method, there is a discussion as to whether the individual effects
should be treated as fixed or random variables. However, this is not an important distinction
because we can always treat the individual effects as random variables without loss in
generality (Wooldrige 2002). However, it is really important to determine whether or not these
individual effects are correlated with the variables observed. To test for the existence of this
correlation, the Hausman test (1978) is usually used. If this test does not reject the null
hypothesis that the individual effects are not correlated with the explanatory variables, the
most suitable estimation would then be the random‐effects model and the best estimator
would be Balestra‐Nerlove’s (1966) generalised least squares estimator. If, on the contrary, the
null hypothesis is rejected, the within groups ordinary least square estimator would then be the
most suitable one. More intuitively, implementing a fixed effect regression allows us to control
for firm‐specific characteristics that are time‐invariant but that could be correlated with the
deals, such as industry or managerial quality.
5. Methodology and data
5.1 Methodology
The key objective of the research is to outline a general framework for the investment deals
realized by VCs and PE firms with respect to Italian SMEs. Being this our aim, foreigner investors
operating in Italy are also included.
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