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

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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, - 6 -
after a merger operation, the portion of credit allocated to small business decreases in the long run after mergers, due to more pronounced size change and more complex organizational structure. 2.2 Venture capital as a solution In line with the above, several authors have suggested that a central distinction between venture capitalists and private equity firms, together, and other financial intermediaries is that the VCs and PEs operate in situations where asymmetric information is particularly significant. Indeed, this form of financing has been very successful in the United States and has spurred the growth of many high‐technology firms. The well known fortunes of such ventures as Yahoo!, eBay, Microsoft, Apple, brought many policy makers and entrepreneurship scholars to regard start ups and venture capital as driving forces for economic growth, job creation and structural change. As for the Italian case, data gathered by the Private Equity Monitor (PEM © ) on the transactions occurred in 2006 and 2005, portrayed in figure 1, show that more than half have dealt with firms recording less than € 60 mil. in terms of sales, confirming the strict relation between SMEs and PE. There are several different reasons which tilt in favour of the involvement of VCs and PEs. First of all, they hold a stake in the firm, but the control rights are proportionately greater when the entrepreneur must be induced to put more effort into ensuring the success of the project. In other words, their presence is enforced by an optimal mix of debt securities and equity securities which, together, ensures the possibility of the backer to become a creditor or a partner according to what it is needed for the full engagement of the entrepreneur. Kaplan and Stromberg (2004) refer to this feature as a separation between control and flow rights. Specifically, control rights allow the venture capitalist to participate to the main decisions of the entrepreneur. As an additional tool, Gompers (1995) recalls the practice of staging of capital infusions, for which prospects for the firm are periodically revaluated: the shorter the duration of an individual round of financing, the more frequently the VC monitors the entrepreneur’s progress and the greater the need to gather information. Finally, they fully embody the characteristics of the subjects able to provide the “certification effect”. We have already argued that the quality of small companies often cannot be observed directly; thus, evaluators must appraise the company based on observable attributes that are thought to co‐vary with its underlying but unknown quality. Resource holders therefore assess value by estimating the conditional probability that a firm will succeed, given a set of observable characteristics of the organization. There are two qualitatively distinct categories of information that influence perceptions of the probability that a young company will succeed. First, important constituencies such as potential investors and customers make quality judgments through careful consideration of the - 7 -
Page 1 and 2: Determinants and effects of Venture
Page 3 and 4: serve larger established companies
Page 5: 2. SMEs challenging the financial i
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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