Small and Medium-Sized Enterprises, Bank Relationship Strength, and the Use of Venture Capital
Journal of Money, Credit, and Banking, Vol. 43, pp. 461-490
42 Pages Posted: 17 Mar 2009 Last revised: 8 Nov 2011
Date Written: September 15, 2010
We investigate the nexus between small and medium-sized enterprises’ (SMEs') use of venture capital and bank financing relationships using a unique dataset with detailed information on SME finance in Italy, Germany, and the UK. The empirical regularities we uncover show that that entrepreneurial firms substitute venture capital for multiple banking relationships. This substitution effect is primarily driven by expertise substitution, and there is also some suggestive, yet inconclusive indication in the data that SMEs turn to providers of venture capital to avoid rent-extracting behavior by the firm’s main bank. Our results do not support the view that firms obtain venture capital in instances when bank financing is difficult to obtain. Instead, venture capital funds are used if bank funding is deemed not appropriate, and firms do seem to be aware of which type of financing is more appropriate for them.
Keywords: relationship banking, small business financing, venture capital
JEL Classification: G21, G24, G28
Suggested Citation: Suggested Citation