The Determinants of Venture Capital in Europe — Evidence Across Countries

Elisabete Gomes Santana Félix,Cesaltina Pacheco Pires,Mohamed Azzim Gulamhussen

doi:10.1007/s10693-012-0146-y

Elisabete Gomes Santana Félix, Cesaltina Pacheco Pires + Show 1 more

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https://doi.org/10.1007/s10693-012-0146-y

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Abstract

This article analyses the determinants of European venture capital activity. The main novelty of our work is in accounting for the idiosyncrasies of the European venture capital market. In particular, we investigate whether the size of the merger and acquisition market (M&A) is important in explaining venture capital. Moreover, our work is the first that analyses the impact of the degree of information asymmetry at the macro level, the direct impact of the level of entrepreneurial activity and the impact of the unemployment rate on venture capital activity. We use aggregate data from 23 European countries for the period 1998–2003 to estimate panel data models with fixed and random effects. Our results reveal that the size of the M&A market and the market-to-book ratio have a positive impact on venture capital activity whereas the unemployment rate influences the venture capital market negatively. These results highlight the importance of the exit environment and of the degree of asymmetric information for the venture capital market.

Highlights

The venture capital companies have an important role to play in the economy
We test whether the unemployment rate, the trade sale divestment and the price/book ratio are important factors in explaining venture capital
This article analyzes the determinants of the European venture capital market using fixed effects and random effects models on a data set with 23 countries for the period from 1992 to 2003

Summary

Introduction

The venture capital companies have an important role to play in the economy. They exist to finance the new growing companies which possess high levels of risk. They stimulate the growth and renewal of the countries economy (Gompers and Lerner, 2001). The importance that this form of investment plays in the revitalization and reorganization of the enterprise tissue, in particular in the small and medium size companies, is the main reason that justifies its interest. All the contributions for a better understanding of this type of investments and, in particular, for understanding the optimal investment and divestment decision are important both in terms of research as well as for their contribution for the economic relationships between agents

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