Partners and International Organizations
(English)
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CEPR (UK), ULB (B), IDEI (F), UNIV. OF SALERMO, CSIC (E), LES (UK)
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Abstract
(English)
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The purpose of this project is to enlighten our understanding of the industrial organization of banking and financial markets in Europe. What explains the financing choices of European companies, and how do the structure of financial and banking markets in Europe affect the financing and the performance of entrepreneurial and established companies? What are the driving forces behind perceived differences between the US/Anglo Saxon 'market based' financial system and the 'bank-centered' systems in continential Europe? What are the 'real' implications of those differences?
Within this general context, we deal with a number of pressing issues:
1. Continental European banks do not only grant credit, typically they also have equity stakes in corporatations. In contrast, US banks are prohibited from taking equity stakes for their own account. What are the implications of this difference for firm financing, the structure of financial markets, and the ability of young firms to obtain firm financing, and ultimately, what are the implications for competitiviness? We investigate those issues within a formal framework and find, contrary to what the perceived wisdom suggests, that banks which hold equity participations in established companies are more eager to finance young companies which would compete with bank-affiliated incumbents. This argument has important implications. First, prohibiting banks from taking equity stakes may harm competition, particularly, when non-bank financing sources are poorly developed. Second, if banks are prohibited from taking equity stakes, the financing of young companies should crowd out to non-bank investors. This is consistent with venture capital financing playing a major role in the US, but, until recently, only a minor role in Europe.
2. Venture capital is a major source of financing for start-up, R&D intensive firms in the US, and more and more so in Europe, too. What explains the optimal choice of funding for an innovator? Should a R&D intensive project be financed by an independent venture capitalist or should it be financed by an corporatation? To what extent play an investor's existing assets and business lines a role in determining corporate venture performance? We address those issues within a formal framework in which an entrepreneur has to decide whether to be financed by a corporatation whose core assets the venture would complement, or an independent investor. We find that corporate venturing underperforms independent venturing, as long as the corporation does not have a significant competitive advantage in financing the venture, which could, for example, stem from its superior industry knowledge. This is because the corporatation lacks an independent venture capitalist's commitment to terminate poorly performing ventures, giving rise to inefficiencies.
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