On the real effects of private equity investment: evidence from new ...

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coe¢ cient implies that the di¤erence in entry rates between the high-entry and the lowentryindustry are 0.44 percentage points higher in Denmark than in Hungary. Thus, allelse equal, an entrepreneur envisioning starting a …rm in a high-entry industry is to a largerdegree better o¤ by operating in Denmark rather than in Hungary than an entrepreneurwho wants to enter a low-entry industry. It is also useful to think of it in terms of the actualvariations in entry rates between the 75th percentile and a 25th percentile industry which is8%. Hence, private equity accounts for 5.5% of that di¤erence.This simple empirical test shows that …rst, private equity investment has a real e¤ectthrough …rm creation. 4Second, the magnitude of increasing private equity investment bytwo standard deviations in our 16-country sample is about half of the e¤ect of loweringentry barriers by two standard deviations in the 24-country sample used by Klapper et al.(2006). 5 In later tests, we perform horse race regressions to compare the e¤ect of privateequity against the e¤ect of barriers to entry, property rights protection, tax burden, andother characteristics of the business environment, and in all cases private equity remains asigni…cant predictor of the variation in cross-country cross-industry entry rates.In the rest of the columns of Table 5, we test the basic result using di¤erent methodologiesand sample speci…cations. In column (ii), we account for left and right censoring by replacingthe OLS speci…cation with a Tobit one. The rationale behind this is that entry rates areleft-truncated at 0 and right-truncated at 1. The coe¢ cient of the interaction term does notchange, however, it becomes statistically signi…cant at the 1% level. Next, we exclude thesub-sample of transition countries (column (iii)). The 1990s were a vibrant period in theeconomic history of Central Europe in terms of privatization, and we would like to eliminatethe possibility that a large number of new private …rms are actually old state-owned …rmswhich have been counted only after they became private.Our results are robust to theexclusion of these countries, but the magnitude of the coe¢ cients and the resulting numericale¤ect decreases slightly. We also look at the e¤ect of private equity on incorporation of small4 However, before addressing the endogeneity probelm, we will be using the word "e¤ect" with caution.5 Klapper et al. (2006) …nd that entry barriers explain about 10% of the entry di¤erence between highandlow-entry industries.ECBWorking Paper Series No 1078August 200919
…rms only (less than 10 employees, column (iv)). The reason for that is that our e¤ect so farcould be upward biased by the fact that some of the "new" …rms in our sample may in factbe the result of M&A. We …nd that the di¤erence in small …rm entry rates between a highanda low-entry industry (75th percentile vs. 25th percentile) is 4.6%, and so a coe¢ cient of0.263 implies that di¤erences in private equity investment explains about 9.5% of the meandi¤erence. We can thus conclude that private equity has a real e¤ect on …rm creation, andthis e¤ect is strongest for small new …rms.Finally, we replace our variable measuring entry rates with a variable measuring exit rates.Entry and exit are considered complementary in creative destruction theories (Schumpeter(1942); Aghion and Howitt (1992; 1998); Geroski (1995)). We use data from Eurostat on theshare of …rms who dropped from the sample at time t but were in it at time t1 to proxy forthe exit element of the creative destruction hypothesis. The implicit hypothesis being testedis that entry rates are also a¤ected by unobservable variables like entrepreneurial culture andrisk attitudes, and so observing an e¤ect of private equity investment on entry rates mayoverstate the true e¤ect of private equity by having the true e¤ect contaminated by demandconsiderations. Exit rates are much more likely to be determined by the supply of fundsrather than the demand for them; one most likely channel for that e¤ect is that ine¢ cientincumbent …rms will leave the population of …rms faster under pressure from more e¢ cientPE-backed newcomers. The last column of Table 5 con…rms that private equity investmentworks well along the lines of the theory of creative destruction, with its e¤ect on exits beingeconomically and statistically at least as strong as the measured e¤ect on entry.4.2 Private equity and entry: contemporaneous vs. long-terme¤ectThere are a number of robustness checks we need to perform on our measure of private equity.First, we have only regressed so far new business entry in 1998-1999 on the contemporaneousmeasure of private equity investment. Alternatively, we could do so using an average measure20 ECBWorking Paper Series No 1078August 2009
Page 1 and 2: Working Paper SeriesNo 1078 / augus
Page 3 and 4: © European Central Bank, 2009Addre
Page 5 and 6: AbstractUsing a comprehensive datab
Page 7 and 8: environment leaves the main results
Page 9 and 10: development and restructuring on sm
Page 11 and 12: to industries which are more R&D in
Page 13 and 14: of destination.We …rst recalculat
Page 15 and 16: 2.3 US industry-level entry dataAs
Page 17 and 18: tend to be heavily regulated and/or
Page 19: speci…c e¤ects. Critically, we a
Page 23 and 24: higher for industries with higher e
Page 25 and 26: percentage of the adult population
Page 27 and 28: cost of …nancing to venture capit
Page 29 and 30: 4.6 RobustnessWe conduct an extensi
Page 31 and 32: is the same as the gap between priv
Page 33 and 34: This paper is, to our knowledge, th
Page 35 and 36: [12] Cetorelli, N., and P.E. Straha
Page 37 and 38: [35] Petersen, M., and R. Rajan, 19
Page 39 and 40: Table 2Summary statistics on entry,
Page 41 and 42: Table 42-digit NACE rev. 1.1 indust
Page 43 and 44: Table 6Private equity timing and fi
Page 45 and 46: Table 8Private equity and alternati
Page 47 and 48: Appendix 1. Variables: definitions
Page 49 and 50: Share shadow economyShare of the in
Page 51: 1068 “Asset price misalignments a

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