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Financial constraints in family firms and the role of venture capital

Author

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  • Annalisa Croce

    (Politecnico di Milano)

  • José Martí

    (Universidad Complutense de Madrid)

Abstract

Based on the natural reluctance of family-controlled firms (FCFs) to accept external shareholders, in this paper we analyze whether investment sensitivity to internally generated cash flow is a driver of venture capital (VC) participation in those firms. We argue that FCFs are more likely to accept external investors when they are subject to serious financial constraints. We also aim to ascertain to what extent VC involvement contributes to reducing the dependency between investments and internal cash flow. We focus on a representative sample of Spanish privately held FCFs that received the initial VC investment between 1997 and 2006, and compare the investment-cash flow sensitivity of VC-backed FCFs with that of non VC-backed FCFs. We find that FCFs that received VC were more financially constrained than other similar non VC-backed FCFs before receiving VC. This finding is especially true in first generation FCFs, thus providing additional evidence on the reluctance of FCFs to accept external shareholders. We also find that VC-backed FCFs, in particular first generation ones, significantly reduce the sensitivity of investments to cash flow after the initial VC round.

Suggested Citation

  • Annalisa Croce & José Martí, 2017. "Financial constraints in family firms and the role of venture capital," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 44(1), pages 119-144, March.
    • Handle: RePEc:spr:epolin:v:44:y:2017:i:1:d:10.1007_s40812-016-0055-4
    DOI: 10.1007/s40812-016-0055-4
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    More about this item

    Keywords

    Venture capital; Family firms; Family generation; Investments-cash flow sensitivity; Financial constraints; External shareholders;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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