On the real effects of private equity investment: evidence from new ...
On the real effects of private equity investment: evidence from new ...
On the real effects of private equity investment: evidence from new ...
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(Stein (2002)). Firms sometimes choose to not adopt <strong>new</strong> technologies although <strong>the</strong>y can,because this would lead to a decline in <strong>the</strong> productivity <strong>of</strong> <strong>the</strong>ir existing businesses (Schoar(2002)). In all <strong>of</strong> those cases, venture capital would be <strong>the</strong> obvious …nancing tool for <strong>the</strong><strong>new</strong> …rms born out <strong>of</strong> <strong>the</strong>se technologies. Finally, Gompers et al. (2005) …nd <strong>evidence</strong> thatentrepreneurial spawning is related to <strong>the</strong> fact that employees <strong>of</strong> established …rms are trainedand conditioned to be entrepreneurs by being exposed to <strong>the</strong> entrepreneurial process and byworking in a network <strong>of</strong> entrepreneurs and venture capitalists. It needs to be emphasizedthat in this paper we only examine empirically <strong>the</strong> e¤ect <strong>of</strong> <strong>private</strong> <strong>equity</strong> on <strong>new</strong> businesscreation, ra<strong>the</strong>r than studying <strong>the</strong> exact channels via which this e¤ect works.The literature has distinguished entry into an industry <strong>from</strong> …rm creation.The …rstaccounts for <strong>the</strong> migration <strong>of</strong> …rms across industries, while <strong>the</strong> second emphasizes pureentrepreneurship (de novo …rms). We focus on <strong>the</strong> second approach and de…ne entry as <strong>the</strong>incorporation <strong>of</strong> a previously nonexistent …rm in <strong>the</strong> respective industry and country. Ourdata comes <strong>from</strong> Amadeus, a comprehensive database <strong>of</strong> corporations across a number <strong>of</strong>developed and transition countries in Europe, in combination with country-level data on<strong>private</strong> <strong>equity</strong> and venture capital <strong>investment</strong> in Europe <strong>from</strong> <strong>the</strong> European Venture CapitalAssociation (EVCA) yearbooks.We …rst study if <strong>the</strong> volume <strong>of</strong> <strong>private</strong> <strong>equity</strong> <strong>investment</strong>, aggregated as well as by stagedistribution, a¤ects <strong>the</strong> extent <strong>of</strong> incorporation, using data on 1998-1999. We aim at identi-…cation by following <strong>the</strong> di¤erence-in-di¤erences methodology …rst introduced by Rajan andZingales (1998) and focus on cross-country cross-industry interaction e¤ects. In essence, westudy whe<strong>the</strong>r <strong>the</strong> fraction <strong>of</strong> <strong>new</strong> incorporation is higher in an industry with higher "natural"entry rates when <strong>the</strong>re is more <strong>private</strong> <strong>equity</strong> ‡owing into <strong>the</strong> country. This approachallows us to bypass <strong>the</strong> omitted variables problem that has plagued traditional research bycontrolling for unobservable characteristics <strong>of</strong> <strong>the</strong> industries <strong>of</strong> interest as well as <strong>the</strong> businessenvironment in <strong>the</strong> respective country. We …nd that <strong>the</strong> rate <strong>of</strong> incorporation in naturallyhigh-entry industries is signi…cantly higher in countries with a larger volume <strong>of</strong> <strong>private</strong> <strong>equity</strong><strong>investment</strong> relative to GDP, and this is particularly true for smaller …rms. The same appliesECBWorking Paper Series No 1078August 20099