Public Policy and the Creation of Active Venture Capital Markets

We study how public policy can contribute to increase the share of early stage and high-tech venture capital investments, thus helping the development of active venture capital markets. A simple extension of the seminal model by Holmstrom and Tirole (1997) provides a theoretical base for our analysis. We then explore a unique panel of data for 14 European countries between 1988 and 2001. We have several novel findings. First, the opening of stock markets targeted at entrepreneurial companies positively affects the shares of early stage and high-tech venture capital investments; reductions in capital gains tax rates have a similar, albeit weaker, effect. Second, a reduction in labor regulation creases the share of high-tech investments. Finally, we find no evidence of a shortage of supply of venture capital funds, and no evidence of an effect of increased public R&D spending on the share of high-tech or early stage venture capital investments. JEL Classification: G10, G24, H20, O30

[1]  James J. Anton,et al.  The Sale of Ideas: Strategic Disclosure, Property Rights, and Contracting , 2002 .

[2]  P. Romer.  Endogenous Technological Change , 1989, Journal of Political Economy.

[3]  Christian Ewerhart,et al.  Sporadic Manipulation in Money Markets with Central Bank Standing Facilities , 2004, SSRN Electronic Journal.

[4]  I. Schindele.  Advice and Monitoring: Venture Financing with Multiple Tasks , 2006 .

[5]  J. Lerner,et al.  VENTURE CAPITALISTS AND THE DECISION TO GO PUBLIC , 1994 .

[6]  Manju Puri,et al.  Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence , 2000 .

[7]  P. Howitt,et al.  Endogenous Growth Theory , 1999 .

[8]  Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries , 1998 .

[9]  Mariagiovanna Baccara,et al.  From Thought to Practice: Appropriation and Endogenous Market Structure with Imperfect Intellectual Property Rights , 2002 .

[10]  Steven N. Kaplan,et al.  The Evolution of Buyout Pricing and Financial Structure in the 1980s , 1993 .

[11]  Fabio Schiantarelli,et al.  Regulation and Investment , 2003 .

[12]  Paul A. Gompers,et al.  Money chasing deals? The impact of fund inflows on private equity valuation , 2000 .

[13]  Javier Suarez,et al.  Venture Capital Finance: A Security Design Approach , 1999 .

[14]  Leora F. Klapper,et al.  Business Environment and Firm Entry: Evidence from International Data , 2004 .

[15]  L. Bottazzi,et al.  What is the Role of Legal Systems in Financial Intermediation? Theory and Evidence , 2008 .

[16]  L. Bottazzi,et al.  Europe's 'New' Stock Markets , 2002 .

[17]  Venture Capitalist.  Taxation of a Venture Capitalist with a Portfolio of Firms , 2002 .

[18]  Lawrence H. Summers,et al.  Tax policy and the economy , 1989 .

[19]  John Armour,et al.  The Legal Road To Replicating Silicon Valley , 2004 .

[20]  Karl Whelan.  Staggered Price Contracts and Inflation Persistence: Some General Results , 2004, SSRN Electronic Journal.

[21]  Da Rin.  Public policy and the creation of active venture capital markets , 2005 .

[22]  Bruce D. Phelps.  Money Chasing Deals? The Impact of Fund Inflows on Private Equity Valuations , 2000 .

[23]  J. Lerner,et al.  The Government as Venture Capitalist , 2000 .

[24]  N. Jonker,et al.  An Empirical Analysis of Price Setting Behavior in the Netherlands in the Period 1998-2003 Using Micro Data , 2004, SSRN Electronic Journal.

[25]  V. Kanniainen,et al.  Venture capital, entrepreneurship, and public policy , 2005 .

[26]  Javier Vallés,et al.  Cross-Country Differences in Monetary Policy Transmission , 2004, SSRN Electronic Journal.

[27]  Denis Gromb,et al.  Entrepreneurship in Equilibrium , 2002 .

[28]  Robert E. Carpenter,et al.  Capital Market Imperfections, High-Tech Investment, and New Equity Financing , 2002 .

[29]  Stefano Scarpetta,et al.  Regulation, Productivity and Growth: OECD Evidence , 2003 .

[30]  R. Gilson,et al.  Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets , 1997 .

[31]  Manju Puri,et al.  The Interaction between Product Market and Financing Strategy: The Role of Venture Capital , 1999 .

[32]  Stefano Scarpetta,et al.  The Role of Policy and Institutions for Productivity and Firm Dynamics: Evidence from Micro and Industry Data , 2002 .

[33]  M. Ivimey.  Annual report , 1958, IRE Transactions on Engineering Writing and Speech.

[34]  Luis Julián Álvarez González,et al.  Price setting behaviour in Spain: stylised facts using consumer price micro data , 2004 .

[35]  Paul A. Gompers.  The Rise and Fall of Venture Capital , 1994 .

[36]  Olli Castrén.  Do Options-Implied Rnd Functions on G3 Currencies Move Around the Times of Interventions on the Jpy/Usd Exchange Rate? , 2004, SSRN Electronic Journal.

[37]  G. Kapetanios,et al.  Forecasting Euro Area Inflation Using Dynamic Factor Measures of Underlying Inflation , 2004, SSRN Electronic Journal.

[38]  Yishay Yafeh,et al.  Sources of Funds and Investment Activities of Venture Capital Funds: Evidence from Germany, Israel, Japan and the UK , 2002 .

[39]  Roman Inderst,et al.  The Effect of Capital Market Characteristics on the Value of Start-Up Firms , 2002 .

[40]  Catherine Casamatta,et al.  Financing and Advising: Optimal Financial Contracts with Venture Capitalists , 2002 .

[41]  Andrew T. Levin,et al.  Identifying the Influences of Nominal and Real Rigidities in Aggregate Price-Setting Behavior , 2004, SSRN Electronic Journal.

[42]  Francis Breedon,et al.  An Empirical Study of Liquidity and Information Effects of Order Flow on Exchange Rates , 2004, SSRN Electronic Journal.

[43]  R. Gilson.  Engineering a Venture Capital Market: Lessons from the American Experience , 2002 .

[44]  G. Iori.  An Analysis of Systemic Risk in Alternative Securities Settlement Architectures , 2004, SSRN Electronic Journal.

[45]  C. Smithson,et al.  Does Risk Management Add Value? A Survey of the Evidence , 2005 .

[46]  Michael Freudenberg,et al.  The Internationalisation of Venture Capital Activity in OECD Countries: Implications for Measurement and Policy , 2000 .

[47]  C. I. Jones,et al.  Measuring the Social Return to R&D , 1997 .

[48]  Maryann P. Feldman,et al.  The Impact and Organization of Publicly-Funded Research and Development in the European Community , 1997 .

[49]  Josh Lerner,et al.  Venture Capitalists and the Oversight of Private Firms , 1995 .

[50]  V. Gaspar,et al.  On Prosperity and Posterity: The Need for Fiscal Discipline in a Monetary Union , 2004, SSRN Electronic Journal.

[51]  Richard R. Nelson,et al.  Science, Economic Growth, and Public Policy , 1996 .

[52]  Joshua S. Gans,et al.  When does funding research by smaller firms bear fruit?: Evidence from the SBIR program* , 2000 .

[53]  Christian Keuschnigg,et al.  Start-Ups, Venture Capitalists and the Capital Gains Tax , 2002, SSRN Electronic Journal.

[54]  Luigi Guiso,et al.  High-Tech Firms and Credit Rationing , 1998 .

[55]  Guido Wolswijk,et al.  What Determines Fiscal Balances? An Empirical Investigation in Determinants of Changes in OECD Budget Balances , 2004, SSRN Electronic Journal.

[56]  L. Bottazzi,et al.  Venture Capital in Europe and the Financing of Innovative Companies , 2002 .

[57]  Samuel Kortum,et al.  Assessing the Contribution of Venture Capital to Innovation , 2000 .

[58]  L. Bottazzi,et al.  Active Financial Intermediation: Evidence on the Role of Organizational Specialization and Human Capital , 2004 .

[59]  Florin O. Bilbiie.  The Great Inflation, Limited Asset Markets Participation and Aggregate Demand: Fed Policy Was Better than You Think , 2004, SSRN Electronic Journal.

[60]  Paul A. Gompers.  Optimal Investment, Monitoring, and the Staging of Venture Capital , 1995 .

[61]  Roland Ricart,et al.  Price Setting in France: New Evidence from Survey Data , 2004, SSRN Electronic Journal.

[62]  G. Wood,et al.  Labour Market Reform and the Sustainability of Exchange Rate Pegs , 2004 .

[63]  J. Driscoll,et al.  Cross-Border Diversification in Bank Asset Portfolios , 2004, SSRN Electronic Journal.

[64]  Klaus M. Schmidt,et al.  Convertible Securities and Venture Capital Finance , 2001, SSRN Electronic Journal.

[65]  J. Stiglitz,et al.  Credit Rationing in Markets with Imperfect Information , 1981 .

[66]  W. Jansen,et al.  Foreign Direct Investment and International Business Cycle Comovement , 2004, SSRN Electronic Journal.

[68]  D. Snower,et al.  The Real Effects of Money Growth in Dynamic General Equilibrium , 2004, SSRN Electronic Journal.

[69]  Peter Hördahl,et al.  A Joint Econometric Model of Macroeconomic and Term Structure Dynamics , 2003, SSRN Electronic Journal.

[70]  William L. Megginson,et al.  Towards a Global Model of Venture Capital? , 2004 .

[71]  James C. Brau,et al.  The Choice of IPO versus Takeover: Empirical Evidence* , 2003 .

[72]  J. Suárez.  Business Creation and the Stock Market , 2000 .

[73]  Thomas Y. Mathä,et al.  How Persistent is Disaggregate Inflation? An Analysis Across EU 15 Countries and Hicp Sub-Indices , 2004, SSRN Electronic Journal.

[74]  L. Kaas.  Financial Market Integration and Loan Competition: When is Entry Deregulation Socially Beneficial? , 2004, SSRN Electronic Journal.

[75]  M. Bussière,et al.  Currency Mismatch, Uncertainty and Debt Maturity Structure , 2004, SSRN Electronic Journal.

[76]  Christian Keuschnigg,et al.  Tax Policy, Venture Capital, and Entrepreneurship , 2000 .

[77]  J. Henry,et al.  The Short-Term Impact of Government Budgets on Prices: Evidence from Macroeconomic Models , 2004 .

[78]  K. Kauko.  Interlinking Securities Settlement Systems: A Strategic Commitment? , 2005, SSRN Electronic Journal.

[79]  J. Poterba.  CAPITAL GAINS TAX POLICY TOWARD ENTREPRENEURSHIP , 1989, National Tax Journal.

[80]  Rolf R. Strauch,et al.  The Design of Fiscal Rules and Forms of Governance in European Union Countries , 2004, SSRN Electronic Journal.

[81]  Paul A. Gompers,et al.  Risk and Reward in Private Equity Investments , 1997 .

[82]  Josh Lerner,et al.  Does Legal Enforcement Affect Financial Transactions? The Contractual Channel in Private Equity , 2005 .

[83]  J. Tirole,et al.  Financial Intermediation, Loanable Funds, and The Real Sector , 1997 .