Bypassing the Financial Growth Cycle: Evidence from Capital Pool Companies

Posted: 9 Nov 2009

See all articles by Cécile Carpentier

Cécile Carpentier

Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Lille II - European Center for Corporate Control Studies

Jean-Marc Suret

Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); European Center for Corporate Control Studies

Multiple version iconThere are 2 versions of this paper

Date Written: 2006

Abstract

An in-depth analysis is conductedof the qualityand performance of firms that utilize the Capital Pool Company (CPC) programimplemented by the Canadian government to bypass the traditional financialgrowth cycle. Data are based on 451 resulting issuers selected from the CanCorpFinancials database on Canadian stock markets between 1995-2001. Three postulates underlie the CPC program: (1) a considerable number ofprofitable companies cannot be financed by conventional tools; (2) small firmscan grow and succeed without the full set of services provided by conventionalfunding providers; and (3) individual investors are able to price correctly thestocks issued by small, young firms. An evaluation of these postulatesindicates that the CPC program fails to confirm the first equity gap postulatethat states that a significant amount of companies require external financingbut are unable to attain financing through conventional tools. It is observed that well-designed contracts, incentive mechanisms, andstringent monitoring are vital to the growth of small businesses, and thereforethe CPC program fails to confirm the second postulate. CPC's program design isfound to be insufficient when providing unsophisticated investors withinformation required to price a stock correctly, and consequently this programfails to confirm the thirdpostulate as well. These findings accentuatethe importance of reexamining public policy regarding the entry of emergingcompanies on the stock market and confirm the critical role of conventionalfunding to small businesses. (NEE)

Keywords: Equity gap, Capital pool companies, Financial growth cycle, Financing, Public policies, Investors, Access to capital, Firm growth, Stock markets, Financial growth, Firm performance

Suggested Citation

Carpentier, Cécile and Suret, Jean-Marc, Bypassing the Financial Growth Cycle: Evidence from Capital Pool Companies (2006). Journal of Business Venturing, Vol. 21, Issue 1, p. 45-73 2006. Available at SSRN: https://ssrn.com/abstract=1500954

Cécile Carpentier (Contact Author)

Laval University ( email )

Pavilion Palasis Prince
Quebec, Quebec G1V 0A6
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th floor
Montreal, Quebec H3C 3J7
Canada

University of Lille II - European Center for Corporate Control Studies ( email )

2 rue de Mulhouse
BP381
Lille, 59800
France

Jean-Marc Suret

Laval University ( email )

Accounting School
Quebec, P.Q. G1K 7P4
Canada
418-656-7134 (Phone)
418-656-7746 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

1130 rue Sherbrooke Ouest
Bureau 1400
Montreal, Quebec H3A 2M8
Canada

European Center for Corporate Control Studies ( email )

2 rue de Mulhouse
BP381
Lille, 59800
France

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