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Crowding Out Private Equity: Canadian Evidence

Douglas J. Cumming

York University - Schulich School of Business

Jeffrey G. MacIntosh

University of Toronto - Faculty of Law

Journal of Business Venturing, Vol. 21, pp. 569-609, 2006

In this paper, we examine a Canadian tax-driven vehicle known as the Labour Sponsored Venture Capital Corporation (LSVCC). As a theoretical matter, we suggest that the LSVCCs can be expected to have higher agency costs and lower profitability than private venture capital funds. We present data that are consistent with this view. The central question that we analyze, however, is whether the tax advantages conferred on LSVCCs have resulted in LSVCCs crowding out, or displacing other types of venture capital funds. Empirical analysis of our data (which covers the 1977-2001 period) is highly consistent with crowding out. The data suggest that crowding out has been sufficiently energetic as to lead to a reduction in the aggregate pool of venture capital in Canada, frusterating one of the key governmental goals underlying the LSVCC programs; namely, the expansion of the aggregate pool of capital. In the course of our analysis, we confirm the importance of macroeconomic factors (the performance of the stock market, real interest rates, and changes in real gross domestic product) in affecting the supply of and demand for venture capital. We also generate evidence that is consistent with the proposition that entrepreneurs in the market for venture capital prefer to incorporate their business federally, rather than provincially.

Number of Pages in PDF File: 48

JEL Classification: G24, G28, G32, G38, K22

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Date posted: September 25, 2002  

Suggested Citation

Cumming, Douglas J. and MacIntosh, Jeffrey G., Crowding Out Private Equity: Canadian Evidence. Journal of Business Venturing, Vol. 21, pp. 569-609, 2006. Available at SSRN: https://ssrn.com/abstract=323821 or http://dx.doi.org/10.2139/ssrn.323821

Contact Information

Douglas J. Cumming (Contact Author)
York University - Schulich School of Business ( email )
4700 Keele Street
Toronto, Ontario M3J 1P3
HOME PAGE: http://booksite.elsevier.com/9780124095373/
Jeffrey G. Macintosh
University of Toronto - Faculty of Law ( email )
78 and 84 Queen's Park
Toronto, Ontario M5S 2C5
416-978-5795 (Phone)
416-978-2648 (Fax)

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