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The Causes and Consequences of Venture Capital Financing. An Analysis based on a Sample of Italian Firms

  • Diana Marina Del COlle,

    ()

    (Bank of Italy,Research Department, Turin Branch)

  • Paolo Finaldi Russo

    ()

    (Bank of Italy, Economic Research Department, Rome)

  • Andrea Generale

    ()

    (Bank of Italy, Economic Research Department, Rome)

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.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 584.

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Date of creation: Mar 2006
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Handle: RePEc:bdi:wptemi:td_584_06
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