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

might be less keen on revealing details of his business due to the risk of losing his ideas and the
related competitive advantages (Ueda, 2004).
Traditionally, banks have always played an important role among all the financial
intermediaries devoted to the support of SMEs. However, under the circumstances outlined
above, the business model of the traditional bank appears to better meet the needs of medium
size firms which have already an established track record and operate in traditional sectors.
In fact, the provision of debt by a bank to a small business is essentially an agency problem
in which the bank (as principal) is using the firm (as agent) to generate a return on money
advanced. This process occurs under conditions of imperfect and asymmetric information
(Berger and Udell, 1995; Keasey and Watson, 1993) which relate both to the ex ante evaluation
of the project and the entrepreneur (adverse selection) and to the ex post monitoring of
performance (moral hazard). Such information problems are not unique to the small firms
sector, but are considerably more prevalent there because of the anticipated higher costs of
information collection.
Traditionally, there is an agreement on the fact that the degree of information asymmetry
may be reduced through two mechanisms: the provision of collateral as part of the debt
contract and the development of a close working relationship between the lender and the
borrower (Binks and Ennew, 1996). Specifically, the low‐risk borrowers who leave the market in
the Stiglitz‐Weiss model (1981) can signal their status by a willingness to offer appropriate
levels of collateral; a close relationship has the potential to provide the bank with a better
understanding of the operating environment facing a particular business, a clearer picture of
the managerial attributes of the owner and a more accurate overview of the prospects for the
business. Stein (2002) stresses this issue showing that local regional banks have superior skills
in acquiring the soft information stemming from the strict contact with small firms active in the
neighbourhood. The less hierarchical and rigid modus operandi of local banks are the key
elements which allow for the acquisition of non‐computable information which is the typical
outcome of the relationship lending business model.
Nevertheless, there are intrinsic characteristic of SMEs which can hinder the process: on the
one hand because of the technology‐intensive nature of their activity and their lack of a track
record, they face severe adverse selection and moral hazard problems; on the other hand, most
of their assets are firm‐specific or intangible and hence cannot be pledged as collateral. By this
meaning we confirm that the credit rationing is especially acute for some clusters of customers:
smaller, younger and independent firms report more difficulties than other firms when asking
for bank credit. Moreover, Del Colle, Finaldi Russo and Generale (2006) show that small
business are usually affected by multiple lending relationships with banks which can imply a
lower information disclosure. The last outcome points out the weaknesses of the relationship
lending model, which sees the unique long‐term nature interaction between firm and bank as
the way information asymmetries can be sort out. Further, the study of Panetta, Schivardi,
Shum (2004) on the effects of the concentration of the Italian banking industry, suggests that,
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