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

More documents

Recommendations

Info

We …nd that private credit doesn’t enter signi…cantly anymore, and access to …nance isinsigni…cant in the case of entry of all new …rms, but in general, our results con…rm thatthe depth of …nancial system, access to …nance and investor protection all matter for entry.Importantly, the private equity interaction continues to enter positively and statisticallysigni…cantly, albeit with a somewhat decreased order of magnitude.4.5 Endogeneity and selectionThe empirical methodology chosen is traditionally prone to endogeneity problems. A measuredpositive coe¢ cient on the composite term of interest does not automatically implycausality; it could be that private equity is endogenous to …rm entry rates, or it couldbe that a set of omitted variables is jointly driving both the propensity to enter and thepropensity to invest in start-up companies, in interaction with our industry characteristicsof choice. The traditional solution in this line of research is to use an instrumental variables(IV) procedure to account for this potential endogeneity. It has been generally agreedthat the country’s legal origin is a strong predictor of the degree of legal regulation and thequality of the …nancial system nowadays (La Porta et al. (1998)). However, in the caseof private equity and entry there are two problems which may reduce legal origin to anine¢ cient instrument. For one, it could be that the link between the exogenous componentof the legal system and private equity investment is relatively weak, but more importantly,it is conceivable that legal systems a¤ect entry via channels other than private equity investment,like barriers to entry, for instance. Hence, we rather look at the types of lawsthat were in place in the 1990s, regulating the ability of pension funds managers to engagein private equity investment. The method is akin to Kortum and Lerner (2000), who use a1979 clari…cation of the Employee Retirement Income Security Act (ERISA) "Prudent man"rule by the Department of Labor allowing pension funds to engage in PE investments as aninstrument for VC investment. 7The idea is that the increased supply of funds reduces the7 Gompers and Lerner (1999) show that VC investment increases more than …ve-fold following the ERISA"Prudent man" rule clari…cation by the US Department of Labor.ECBWorking Paper Series No 1078August 200925
cost of …nancing to venture capitalists, and hence serves as a supply shifter, while it has noe¤ect on the availability of ideas that need start-up …nance. 8We create a dummy equal to 1 if pension funds were allowed to invest in private equityin the respective country prior to the sampling period, and to zero otherwise. We also createa variable which is constructed by interacting the pension funds dummy with the averagesize of pension funds in the respective country as share of GDP over the 1995-1999 period 9 .Being correlated with the predetermined components of private equity and venture capitalinvestment and exogenous to current business opportunities makes these variables reasonableinstruments, even in a small-sample context with linear estimation. 10In an (unreported)exercise we …nd that a …rst-stage regression including the two instruments one at a time, aswell as together, explains between up to 65% of the cross-country variation in private equity,with an F-value of up to 12.5. In addition, countries that enacted such a measure have seenthere PE funds raised increase by 95.5% more on average over the period 1991-1999 thancountries which did not. We report the estimates from the second stage in columns (i)-(ii)and (vi)-(vii) of Table 9. We …nd that the estimate of 1 is still positive and still highlysigni…cant, and does not vary dramatically in magnitude from the estimates of the OLSregressions.However, a common ‡aw of this method is that countries with large industries withhigh natural entry may have both higher entrepreneurial culture (resulting in more entryregardless of private equity investment) and higher levels of private equity investment (dueto higher demand for all types of …nance). One method to control for that possibility is toexclude the industries that are in the right tail of the industry size distribution. We restrictour sample to the industries that are in the bottom tertile, bottom two tertiles, or outside thetop 10% of their country’s industries in terms of size. When we do that, in all cases we get8 Unfortunately, given the aggregated data we are provided with, it is impossible to construct a moredirect proxy of the cost of …nance.9 The data for pension funds size in the 1990s comes from Eurostat.10 It is possible that these laws were enacted following pressure from a growing PE industry, or a lack ofentrepreneurial activity (which would make them correlated with PE and hence null the exclusion restriction).It is a fact, however, that the formal motive expressed during the legislative process has universally beendiversi…cation of risk (EVCA yearbooks, 1991-1999).26 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 and 20: speci…c e¤ects. Critically, we a
Page 21 and 22: …rms only (less than 10 employees
Page 23 and 24: higher for industries with higher e
Page 25: percentage of the adult population
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

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

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?