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

estimates which are still positive and signi…cant, similar to magnitude to the ones estimatedpreviously, and they do not vary much regardless of the de…nition of "small industries" thatwe use. The coe¢ cient after the exclusion of the top 10% is reported in columns (iii) and(viii) (for entry by all …rms and by …rms with less than 10 employees, respectively).Another selection concern is that in countries whose culture is adverse to entrepreneurialactivity (and hence, there is naturally less entry), there are also stricter rules guiding privateequity investment, as the local legislatures would be adverse to business activity in general.We account for that possibility by distinguishing the general quality of laws in the respectivecountry. The above argument would imply that if it is a selection problem, private equityinvestment will have a larger e¤ect in countries where the quality of laws is generally lower.This is not the case; in fact as indicated in columns (iv) and (ix), the e¤ect is the opposite– more private equity leads to relatively higher entry in high-entry industries in countrieswith well-developed legal systems, implying no omitted variable bias.Finally, we have to account for the possibility that by focusing on legal entry, we may beoverlooking activity in the informal sector. To account for the possibility that our results arebiased by not considering a potentially large dynamics in the informal sector, we next useEnste and Schneider’s (2000) measure of the size of the informal economy to control for that.In columns (v) and (xi) of Table 9, we regress …rm entry on two triple interaction terms,in which the industry natural entry-country private equity investment has been interactedwith dummies for high and low degree of the informal economy, where low share of theinformal economy equals 1 if the country is in the bottom tertile of the informal economyshare, and to 0 otherwise, and high share of the informal economy equals 1 if the country isin the top tertile of the informal economy, and to 0 otherwise. The coe¢ cient on the tripleinteraction term including the low informal economy dummy is positive, implying that incountries where for tax or regulatory reasons there is little activity in the informal sector,private equity is indeed associated with higher entry in industries that naturally have higherentry rates.ECBWorking Paper Series No 1078August 200927