Academia
The different roles played by venture capital and private equity investors on the investment activity of their portfolio firms.
Results on the Differential Financial Roles of Venture Capital and Private Equity Investors
This study examines the differential impact of Venture Capital (VC) and Private Equity (PE) investments on the financial constraints and investment behavior of firms. The analysis is based on the estimation of Equation 1, with separate assessments for expansion-stage firms (pre- and post-VC investment) and buyout-stage firms (pre- and post-PE investment). The results are detailed in Tables 3 and 4, with robustness checks and additional tests presented in Tables 5 through 8.
Key Findings:
- Expansion Stage Firms and VC Investment:
- Pre-investment Period: The sensitivity of investments to internal cash flow is significantly high before VC investments, ranging from 0.6692 to 0.9141. This indicates that firms at the expansion stage heavily rely on internal cash flows for their investments, supporting Hypothesis 1a.
- Post-investment Period: After receiving VC funding, the sensitivity to internal cash flow drops considerably to a range of 0.2923 to 0.4360 and becomes statistically insignificant. This finding aligns with Hypothesis 2a, suggesting that VC investment alleviates financial constraints for expansion-stage firms.
- Buyout Stage Firms and PE Investment:
- Pre-investment Period: For buyout-stage firms, pre-investment cash flow sensitivity is low (between 0.0597 and 0.1871) and not statistically significant. This supports Hypothesis 1b, indicating that these firms are not constrained by financial limitations before acquisition.
- Post-investment Period: Post-investment cash flow sensitivity increases significantly, with coefficients ranging from 0.4687 to 0.4936. This suggests that after PE investment, firms face increased financial constraints, likely due to the leveraged nature of buyouts and the strategic shifts implemented by PE investors.
- Robustness Checks and Additional Tests:
- The results remain consistent across various estimation techniques, including System-GMM, Difference-GMM, OLS, FE, and Hausman-Taylor methods. This robustness adds credibility to the findings regarding investment-cash flow sensitivity pre- and post-investment (Table 5).
- Firm age is incorporated into the model to control for its potential impact on investment behavior. The inclusion of firm age does not alter the main findings, reaffirming the initial hypotheses (Table 6).
- Excluding the three-year period surrounding the investment event confirms the persistence of the observed effects beyond short-term impacts (Table 7).
- Additional analyses on different subsamples, such as excluding PTP transactions and divisional buyouts, show consistent results, indicating that the findings are not driven by specific deal types (Table 8).
Conclusion:
The study underscores the distinct roles played by VC and PE investors. VC investments significantly reduce financial constraints for expansion-stage firms, facilitating their growth by providing necessary capital. Conversely, PE investments do not affect pre-existing financial constraints in buyout firms but introduce new constraints post-investment due to increased leverage and strategic changes.
The robustness of these results across various models and tests enhances their reliability. The study contributes valuable insights into how VC and PE investments influence firm behavior differently, highlighting the importance of considering the stage of investment when assessing the impact of external funding.
Limitations and Future Research:
The research acknowledges limitations such as the sample size, which restricts more granular analyses, and the exclusion of seed and start-up stages due to data unavailability. Future research could expand the sample size, include various investor characteristics, and consider an international context to provide a more comprehensive understanding of the differential impacts of VC and PE investments.
The study provides a foundational understanding of the financial dynamics introduced by VC and PE investments, offering a basis for future explorations into how these funding sources affect firm growth and strategic decision-making.