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

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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
4.6 RobustnessWe conduct an extensive robustness analysis whose detailed exposition is left for a companionpaper available upon request for the sake of brevity. We …rst estimate the e¤ect of privateequity investment on entry, accounting for the standard industry determinants of entry thathave been suggested by the literature.In particular, it has been pointed out that entryrates are a¤ected negatively by …nancial dependence and capital intensity, and positivelyby technological opportunities and industry growth, among else. 11We therefore want tomake sure that the e¤ects we are measuring are not driven by other industry characteristicsfor which our measure of "natural entry" is a proxy. We …nd that some characteristics ofthe business environment matter for entry exactly as predicted: higher intellectual propertyprotection is associated with higher entry in industries that naturally invest more in R&D,and lower entry costs are associated with relatively higher entry in industries that are growingfaster. Importantly, in all cases higher private equity investment keeps its independent e¤ecton entry, and this e¤ect is still relatively stronger for naturally high-entry industries. Thise¤ect also survives the "horse race".Next, we look at a set of characteristics of the business environment, which the literaturehas identi…ed as predictors of entry: entry barriers, labor regulations, human capital, intellectualproperty rights protection, and taxes. To the degree that all of those tend to followa similar path over time, the e¤ect of private equity investment on entry could be contaminatedby developments along other dimensions of the business environment. We accountfor all those possibilities by including an interaction of the industry’s natural propensityto entry with another characteristic of the business environment, one at a time, and all ofthem simultaneously. We con…rm that barriers to entry have a detrimental e¤ect on entryrates. We …nd that labor regulations have no signi…cant e¤ect on entry, although Europe istraditionally regarded as a labor constrained environment. Better protection of intellectualproperty rights is associated with relatively more entry in high-entry industries, which alsotend to be the ones that are the most intangibles-intensive. Finally, cross-country variation11 See Geroski (1995) for a summary of the empirical evidence on that.28 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 and 26: percentage of the adult population
Page 27: cost of …nancing to venture capit
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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