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

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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. - 4 -
2. SMEs challenging the financial industry. 2.1 About SMEs During the post war period there has been an almost unanimous chorus by academics and practitioners supporting the clear drawbacks of small‐medium enterprises when compared to larger ones. Empirical evidence pervasively indicated that SMEs were less efficient, were remunerating less their employees, were less prone to innovate and thus bound to a decline as for economic growth. Generally, small size was perceived as a preparatory step in view of a consolidation of a tiny number of efficient large firms (Audretsch 2002). Conversely, since 80’s this position has been reconsidered owing to an upwarding trend in terms of magnitude and relevance of SMEs in the most developed industrial areas. According to the recent economic literature there are several key elements which can explain the new setting. First of all, radical changes have occurred to production processes by means of softening the well‐established relation size‐efficiency for the benefit of those ones able to recognize the technological gap and set up flexible organisations. As a second factor, which still makes reference to the production factors, we should highlight the changes that have occurred to the labour force that started to appraise positively the above mentioned needs for flexibility. On the demand side, the enlargement of the markets followed the expansion of customers’ taste, highlighting, once again, the urge for specialised production and better skills in allocating the resources. Under these different circumstances, new theories based on the Knowledge economy appraise the role taken by SMEs as fundamental components of new patterns in economic growth. As a matter of fact, the tiny margins stemming from continuous improvements of products, materials, processes, can be of a sufficient magnitude for the profitability of a small business; while for large firms this could not be always the case. Along with the review of SMEs as entities capable to drive upward the general economy, a large body of literature paid much attention to the issue of the financial constraints faced by new business which may hinder their birth and their development. Acute financial risks add to the normal operating risk due to the lack of internal resources. The kind of financial risk attached to young SMEs arise from market imperfections which make reference to information asymmetry factors, to transaction and agency costs and more generally to the inadequacy of the financial systems meeting the needs of these businesses. Firstly, smaller and younger firms are usually in short supply of managerial skills and of the ability of conveying structured information to investors (Caselli, 2004). Secondly, a higher degree of opaqueness applies to the case of SMEs, due to the fact that the identity of owners and managers often coincide: as a result, backers, while running their evaluations, will privilege real guarantees to the future returns indicated by the firm. Finally, the innovative entrepreneur - 5 -
Page 1 and 2: Determinants and effects of Venture
Page 3: serve larger established companies
Page 7 and 8: after a merger operation, the porti
Page 9 and 10: that when size of projects becomes
Page 11 and 12: contact between the lead investor a
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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