Financial market imperfections, control aversion and venture capital in Spanish SMEs

Abstract

Information asymmetries and control aversion limit the capacity of Small and Medium Enterprises (SMEs) to take advantage of growth opportunities. In this work we analyse to what extent Venture Capital (VC) can play a positive role by allowing a temporary shareholder to reduce the investment dependency on internally generated funds. We study a sample of 322 Spanish VC-backed SMEs at the expansion stage, and a one-by-one matched sample of non-VC-backed firms. We find that both groups of firms exhibit a significant sensitivity of investments to cash flows before the initial VC investment. VC, however, is effective in reducing investment cash flow sensitivity in the post-investment period in the group of VC-backed companies.