The Causes and Consequences of Venture Capital Financing: An Analysis Based on a Sample of Italian Firms

48 Pages Posted: 12 May 2006

Date Written: March 2006

Abstract

The analysis of the determinants and the effects on firm performance of venture capital finance for a sample of Italian enterprises indicates that small, young and more innovative firms are more likely to be financed by a venture capitalist. Our results confirm that venture capital can help reduce financial constraints for firms that are more difficult for external investors to evaluate. We also show that larger firms resort to venture capitalists when their indebtedness with banks is high and we find evidence that venture capital financing is more frequent after periods of high growth and investment, a result that points to the advisory role of the venture capitalist. A novel result emerges: venture capital also finances firms with multiple banking relationships. In the presence of multiple lending, banks could have greater difficulty monitoring firms with asymmetric information; moreover, if firms default, banks are likely to have a weaker bargaining position. In these cases, the amount of bank credit is probably near its limit and firms need to resort to venture capital, a contract that reduces the amount of guarantees needed to access external finance.

Keywords: Venture capital, Private equity

JEL Classification: G24, G32

Suggested Citation

Generale, Andrea and Del Colle, Diana Marina and Finaldi Russo, Paolo, The Causes and Consequences of Venture Capital Financing: An Analysis Based on a Sample of Italian Firms (March 2006). Bank of Italy Economic Research Paper No. 584. Available at SSRN: https://ssrn.com/abstract=901949 or http://dx.doi.org/10.2139/ssrn.901949

Andrea Generale (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Diana Marina Del Colle

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Paolo Finaldi Russo

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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