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

Many researchers also applied it to the context of the VC and PE industry. However, most of
them aimed at examining how financial institutions help to resolve the asymmetric information
inherent in the Initial Public Offering (IPO) process. On the contrary, there is scant literature
which interprets the VCs and PEs as agents able to produce information about the qualities of
SMEs, and above all we could not find any evaluation of the Italian case. Indeed, the second
contribution relates to the provision of firm evidence supporting this view.
This study adds to the existing literature by testing the “certification effect” through a
combination of variables that have been singularly suggested by different studies at
confirmation of the presence of such effect (Beatty, Ritter, 1986; Del Colle, et al., 2006;
Borisova, 2007; Hyytinen and Pajarinen, 2007). In particular, we apply the same econometric
procedure as for the effects of VC and PE to proxy variables of access to credit granted by banks
and trade credit, defined as the average length of purchases over the fiscal year.
Our results confirm that, as in the United States, VCs and PEs more likely finance younger,
smaller and thus riskier firms. Coupling these results with sustained investments in intangible
assets both ex‐ante and ex‐post the date of the deal we can support the theory which sees VC
and PE as a solution to problems of asymmetric information. Moreover, looking at the patterns
of growth, rate of investment and sales recorded after the deal we find evidence that is
consistent with the role of the external investor as a consultant. As another interpretation of
these facts we reject, as far as the Italian market is concerned, the theory of venture capital
spurring the innovation. As a matter of fact, most of deals show a slowdown of growth and
investment in fixed assets which follows an higher than average period of investment and
growth, which we interpret as an implicit aim to contribute to the consolidation of a firm’s
result. Finally, the results bring forth the presence of certification effect as confirmed by the
broadening of access to bank credit at better conditions and the consequent reduction of trade
credit, consistent with the theory of Petersen and Rajan (1997).
The paper proceeds as follows: Section 2 draws on the main features of SMEs and financial
industry to set the potential positive interaction between VC and PE. Section 3 describes the
theoretical background and the major contributes of the existing literature. In Section 4 we
briefly recall various corporate finance theories and empirical evidence that are useful to
highlight the likely determinant and effects of VC and PE financing. In addition, it presents the
econometric models in use. Section 5 describes the sources of our data, its main features and
the results for the econometric analysis on the determinants and effects of VC and PE financing.
Section 6 concludes.
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