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

previous accomplishments of the organization. Secondly, the identity of exchange partners
becomes a primary consideration when potential investors, customers, employees, suppliers,
and other exchange partners decide whether to commit their resources to a new enterprise.
Since SMEs are mostly affected by information opaqueness and they usually lack of long
track record, we are particularly interested on the second category. The starting point of much
of this work is the observation that social or industrial structures can be represented as a set of
positions that are arranged hierarchically according to the prominence of their occupants.
Baum and Oliver (1991) demonstrated that organization‐to‐institution ties signal conformance
to institutional prescriptions and thereby facilitate young organizations in their attempts to
acquire legitimacy and other resources (see also Aldrich and Auster, 1986). Summing up, it is
possible to identify three eligible social mechanisms that may lead would‐be investors,
customers and other potential exchange partners to take into account the characteristics of a
focal new venture's affiliates as they strive to assess its unobserved and uncertain quality
(Stuart, Hoang and Hybels, 1999): (1) relationships have reciprocal effects on the reputations of
those involved, (2) the evaluative capabilities of well‐known organizations are perceived to be
strong, and (3) relationships with prominent organizations signal a new venture's reliability,
and, thus, its high likelihood of survival.
Together, these three social processes suggest that, for a small venture, gaining a
prominent affiliate serves to enhance perceptions of its quality.
3. Literature Review and Hypothesis
3.1 Literature related to the determinants of Venture Capital and Private Equity financing
The theoretical literature regarding the financing of small firms commonly shares the view
on the additional difficulties faced in order to obtain external finance owing to greater
information opaqueness. Asymmetric information problems between firms and financiers
strongly affect their relationship and shape the nature of the contract between them, such as
the choice of debt versus equity, and for debt the presence of collateral, covenants and the
maturity of the loan. First, there are agency problems. Debt increases moral hazard problems:
following Jensen and Meckling (1976) firms can substitute high‐risk projects for low risk
investments; high‐risk projects increase the probability of bankruptcy, but offer no offsetting
gain to debt‐holders if success is achieved. Second, as Carpenter and Petersen suggest (2002b),
the marginal cost of financial debt could increase very quickly for small firms because fewer
tangible assets can be used to secure loans. Thus, bank finance may not be viable.
Unlike debt, equity finance does not increase the probability of bankruptcy. Moreover,
upside returns are not bounded for investors who buy equity. Aghion and Bolton (1992) and
Aghion et al. (2004) propose a model, based on control rights, which comes to the conclusion
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