ECB Working Paper on the Real Effects of Private Equity Investment: Evidence from New Business Creation
03 September 2009
Private equity investment seems to lower the cost of start-up capital and results in higher industry dynamics with private equity investment having a beneficial effect on entry.
This Working Paper released by the European Central Bank in August 2009 looks at 'the Real Effects of Private Equity Investment Evidence from New Business Creation'. The authors argue that “by offering a unique combination of ownership and incentives, private equity investment seems to lower the cost of start-up capital and results in higher industry dynamics, and that private equity investment has a beneficial effect on entry, which is relatively higher for industries which naturally have higher entry rates and are more R&D intensive”.
Using a comprehensive database of European firms, the ECB studies how private equity affects the rate of firm entry. The findings are that private equity investment benefits new business incorporation, especially in industries with naturally higher entry rates and R&D intensity. A two standard deviation increase in private equity investment explains as much as 5.5% of the variation in entry between high-entry and low-entry industries.
The report addresses endogeneity by exploiting data on laws that regulate private equity investments by pension funds. Our results hold when we correct for barriers to entry, general access to credit, protection of intellectual property and labour regulations.
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