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

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Klaus Schaeck

University of Bristol

Date Written: September 15, 2010

Abstract

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

Berger, Allen N. and Schaeck, Klaus, Small and Medium-Sized Enterprises, Bank Relationship Strength, and the Use of Venture Capital (September 15, 2010). Journal of Money, Credit, and Banking, Vol. 43, pp. 461-490. Available at SSRN: https://ssrn.com/abstract=1361177

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Klaus Schaeck

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

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