Impact of Venture Capital in the Layoff Decisions of
Family Firms during Financial Crisis
Student: Danxiu Shen
ID: 11114959
Thesis Supervisor: Dr. Torsten Jochem
Date: August, 2016
University of Amsterdam
Amsterdam Business School
Master in International Finance
Preface and acknowledgement
I am highly indebted to my supervisor Dr. Torsten Jochem, it would be impossible for
me to finish the thesis without his kind support and elaborate comments and feedback.
I would also like to express my gratitude to my parents, friends and colleagues for
their encouragement and support.
Abstract
Using data of family firms in 42 countries from 2006 to 2009, this paper finds that the
layoff decisions in family firms backed by venture capitalists are severely intervened.
In particular, family firms with venture capital tend to be associated with more
employees, while in financial crisis, VC-backed family firms tend to downsize more,
which supports prior literature that venture capital is playing an active role in the
corporate governance of its portfolio company. Finally, propensity score matching
technique is employed to substantiate the significance of venture capital in the life of
family firms.
Keywords
Content
Abstract ………... 2
Chapter 1. Introduction……….5
Chapter 2. Literature Review and Hypothesis Development………8
Chapter 3. Methodology………...12
Chapter 4. Data and Descriptive statistics………14
Chapter 5. Emperical Results………...16
Chapter 6. Robustness Check……….19
Chapter 7. Conclusion……….22
Reference……….23
Chapter 1. Introduction
In a recent Presidential Address to the American Finance Association, Rajan (2012) developed a theory of the firm and its financing mechanism in a setting where the creation of value requires many collaborators with their identities changing over time. He argues that a private firm undergoes two important transformations over its early life. He refers to the first transformation as “differentiation”, whereby an entrepreneur brings together a group of people and the assets they work with to create an organization, leading to the production of distinctive goods and services. Since a differentiated, unique enterprise is hard for outsiders to finance due to the severe information asymmetry between the product developer and the market, also between the firm and the lender from whom the firm intends to finance from, then how to finance and to what extent a firm can get external financial resource is critical for an entrepreneur to purchase the assets she needs for to sustain her enterprise. In addition to differentiation, Rajan argues that the firm needs to undergo a second transformation, namely, “standardization,” whereby the firm’s operations are standardized so as to make the firm’s key human capital more replaceable and liquid, even while it continues to produce differentiated products or services. Rajan further argues that equity (rather than debt) is the appropriate security to finance such a transformation and that equity market plays an important role in this second transformation (e.g., through an initial public offering) by rewarding the entrepreneur for standardizing the firm. Finally, Rajan argues that, in a venture capital (VC) backed firm, the VC can help the standardization process by advising the entrepreneur and by motivating her to implement this transformation.
Family entities control a large number of publicly traded firms around the world. Lin et al. (2013) analyzed whether and how family control affects firm value and the firm’s corporate decisions during the 2008–2009 financial crisis. They find that family-controlled firms underperform significantly, they cut investment more sharply relative to other comparable firms that are not controlled by family members, and these investment cuts in the end lead to even deeper underperformance. Furthermore, they find that within family groups, liquidity shocks are passed on through investment cuts across groups. This evidence is consistent with families taking actions to increase the likelihood that the firms under their control and their control benefits survive the crisis, at the expense of outside shareholders. In further tests, they show that when a family controls multiple firms at the same time and one of the firms in the family group is hit strongly during the crisis, it turns out that not only in the firm under crisis strike, but the family tends to reduce investment in other relatively healthier subsidiary firms as well. Taken together, their evidence implies a conflict of interest to explain the underperformance of family-controlled firms during the crisis. The study basically discusses the cause of the underperformance of family controlled firms compared to the non-family controlled firm.
Based on the fact that family firms play an important role in the financial market and venture capital have huge influences in the “standardization” and the corporate governance of firms, it is important to learn whether these two factors (VCs and family firms) combined together would have a different impact on corporate governance when considering the economic downturns. Though how family control can influence firm value and VCs influence their
portfolio firms have been studied extensively, the aim of the research is to study the impact of venture capital over the layoff decisions of family firms during the financial crises. It is not yet known whether VCs have a positive or negative effect especially on family firms when dealing with financial crisis.
Chapter 2. Literature Review and Hypothesis Development
This paper is related to three strands in the corporate finance literature. The first strand is the literature on venture capital financing. In particular, prior literature mainly documents that venture capitalists may add value to the firms they invest in beyond simply provide external financing (Dushnitsky and Lenox, 2006; Sapienza et al., 1996; Brander and Antweiler, 2002.). Based on hand-collected data from Silicon Valley, Hellmann and Puri (2002) suggest that venture capitalists play roles over and beyond those of traditional financial intermediaries, such as human resource policies, the adoption of stock option plans, and the hiring of a marketing VP. A few papers in this strand of literature have studied the role of venture capitalists in intensively monitoring firm managers (Gompers (1995) and Lerner (1995)), and the effects of VC intervention on corporate board structure (Baker and Gompers (2003) and Hochberg (2012)) and on earnings management by entrepreneurial firms (Hochberg (2012)). Chemmanur et al. (2011, 2013) show that while overall efficiency gains generated by VC backing arise primarily from improvements in sales, the efficiency gains of high-reputation VC-backed firms arise also from lower increases in production costs. Kaplan et al. (2009) study 50 VC-backed companies, and analyze how their firm characteristics (financial performance, line of business, points of differentiation, non-human capital assets, growth strategy, top management, and ownership structure) evolve from a business plan to IPO. However, none of the papers above has properly addressed the effects of VC intervention towards the family firms’ performance during the financial crisis period.
The second strand is the literature on family firms. Several papers in this literature have documented that, while family ownership has some advantages in terms of maximizing shareholder value, for example, in terms of stronger incentive to monitor the performance of CEOs (see, e.g., Anderson and Reeb (2003)), family ownership also suffers from significant disadvantages arising from conflicts of interest between family shareholders and other minor shareholders (see, e.g., Shleifer and Vishny (1997), Anderson and Reeb (2004), and Villalonga and Amit (2009)). In response to Himmelberg et al. (1999) argument that after controlling for firm heterogeneity managerial ownership is unlikely to influence firm performance, Zhou (2001) show that managerial ownership, while substantially different across firms, typically changes slowly from year to year within a company, thus it may dynamically has an impact on firm’s prospect. A large literature has documented that, unlike the family firms in the U.S. and Japan where equity ownership of listed firms on average is diffuse, in a typical Asian or European family firm equity ownership is quite concentrated, with one or few members of a family tightly holding the majority firm shares. Bach et al. (2009) find that within the dynastic regime of a family firm, family-prompted CEOs are associated with lower turnover of the workforce, lower wage negotiation and greater loyalty for the incumbent workforce. Miller et al.(2012) also support this argument by stating that family involvement is related to greater, not lesser, conformity in many aspects of strategy. Baek et al. (2004) find that, in comparison Korean firms with larger ownership by unaffiliated foreign investors, chaebol firms with concentrated ownership by controlling shareholders experienced a larger drop in firm value. A number of papers in this literature have also documented the agency conflicts existing between controlling (family) shareholders
and minority shareholders: see, e.g., Porta et al.(1999), Claessens et al., (2000, 2002), Faccio and Lang (2002), Faccio et al. (2001), and Johnson et al. (1997). In addition to that, a number of papers document that, when a larger number of family members are involved in controlling and operating a family firm, the performance of the firm suffers (Miller et al. (2007) and Bertrand et al., 2008). Almeida and Wolfenzon (2006) argue that, due to market imperfection, conglomerates tend to direct internal funding to mediocre investment projects despite of other lucrative project in need of large of financial sources. Apart from expropriation, namely the tunneling behavior of the controlling family, family firms’ underperformance is also a result of its pyramidal ownership structure in the sense that chaebols still choose to execute value-destroying acquisitions as long as the chaebols could trade firm shares at a discount value (Subrahmanyam et al., 2011).
A third aspect is from the corporate governance perspective during the crisis. While the macroeconomic factors (e.g., loose monetary policies) that are at the roots of the financial crisis affected all firms (Taylor, 2009; Campello et al., 2010), some firms were affected much more than others. They argue that the unexpected liquidity shock from the financial crisis moves firms’ financial conditions away from equilibrium in a way that magnifies both the benefits and costs of family control. Beber and Pagano (2013) find that bans on short-selling are detrimental for liquidity especially for small stocks with small capitalization and no listed options. With the scarcity of liquidity source, a family could add value by reallocating greater access to financial resource via other firms under the control of the same family group. However, in the meanwhile, a family’s private benefits of control also can be affected by the
crisis. In comparison with firms controlled by more diversified shareholders, family-controlled firms may be biased toward survival-oriented actions that help preserve the family’s control to save their own benefits at the expense of outside shareholders. In particular, the family firms could be no longer honored their long term goals written in the contracts in the sense that family firms also lay off employees and cut labor expenses in order to survive. This paper fulfills the gap to analyze that, during the financial crisis, whether the firm’s decisions on labor expenses and employees’ layoff would differ between VC-backed family firms and family firms without the intervention of venture capitalists.
Therefore, to summarize, there are four hypotheses to be test in this paper:
Hypothesis 1: Family firms backed by venture capitalists tend to be associated with more employees compared to those without VC intervention.
Hypothesis 2: During financial crisis, VC-backed family firms tend to downsize more than family firms without VC intervention.
Hypothesis 3: During financial crisis, the sensitivity of layoff decisions in family firms to VC intervention decreases with firm size.
Hypothesis 4: During financial crisis, the sensitivity of layoff decision in family firms to VC intervention decreases with firm profitability.
Chapter 3. Methodology
In this paper, I will use panel data regression to test the effects of VCs in layoff decisions in the family firms during crisis. To test the impact of venture capital on the layoff decisions in family firms, the baseline model is listed as follows (Model 1):
Model 1:
Employees_i,t = α + β*VC_i,t + Θ’*X_i,t +εit Model 2:
Employees_i,t = α + β*VC_i,t + γ*DuringCrisis_t + δ*(VC_i,t * DuringCrisis_t) + Θ’*X_i,t +εit In particular to test the governance role of venture capitalists in family firms during the period of financial crisis, one interaction term of the dummy, During Crisis_t, with the dummy VC_it is added to the baseline model (Model 2). In next section, both of these models will be
tested.
Variable Definition: - Key Variables
Employees- Log (The number of employees in family firm i in a given year t).
VC – Dummy variable equal to 1 if a family firm is backed with venture capital in a firm-year.
During Crisis –Dummy equal to 1 if the firm year is 2008 or 2009, otherwise zero. - Control Variables
Firm Size – Log (Total assets of a family firm in a firm year).
Liquidity – Measured by liquidity ratio and solvency ratio.
The coefficients γ captures then how all firms cut employees during the crisis years, and β captures the number of employees in firms across all years where VC firms are usually invested (relative to firms without VCs). The coefficient of interest is then δ, which measures the change in employees during crisis years when a VC is present relative to firms without VCs during the crisis years. Xi refers to a set of firm-specific control variables from Financial
Data, Global Standard format, detailed format, Global Ratios list which are available in Orbis. Specifically, I choose firm size (total asset), leverage ratio, book-to-market, short-term debt, liquidity ratio, operating revenue as control variables (both can be available for public and private firms). Since the VC’s share percentage in a family firm is relatively small, I will choose the mean of the all the VC’s shares percentage, approximately 10% as a threshold. For those with VC’s share percentage over 10%, I define it as VC backed family firms.
Chapter 4. Data and Descriptive statistics
The data are all available in Orbis. The number of employees can be found in the database as a specific criteria. The family firm definition is used the same criteria as in Lins et al. (2013). I use the 25% threshold in Orbis database and choose the shareholder characteristic as individual or family in which at least one shareholder owns at least 25% or more shareholdings within the family firm. For VC list, I obtain the VC list from Orbis by choosing the type of entity. Then with the BvD number of each VC, I can cross check them by shareholder names of all the family firms. Despite the fact that not all family firms are listed, one advantage of this dataset is that the observations span from public to private family firms. In this paper, I will mainly investigate North America, Asia (specific countries as China, Hong Kong, Taiwan, Japan, India, Singapore, Malaysia and Thailand), South Korea, Western Europe and Australia, New Zealand. The number observation for all family firms located in the four continents above with employee numbers available from 2006-2009 is 26,275. Table 1 exhibits the descriptive statistics of key variables of our sample family firms.
(Insert Table 1 Here)
The statistic features of these accounting variables are comparable to the results in Lins et al. (2013). It can be seen that it terms of firm size and firm profitability, there’s great standard deviation within our sample, which makes it important to test whether there would be any heterogeneity among firms when investigating the impact of VC intervention over the layoff decisions in family firms. Here it should also be noted that although intuitively variables such as operating revenue, net income and EBIT are all proxy for firm profitability, they are
actually not statistically correlated. Although not shown here, the pairwise correlation among these variables is not greater than 0.5.
(Insert Table 2 Here)
To illustrate the potential extrapolation of the results to be shown in next section, here a table of the distribution of VC-backed family firms is shown, with the number of observations of family firms classified by country name. It can be shown from Table 2 that, most of family firms backed by venture capitalists are located in Spain (“ES”) with the proportion at 43.40%. Italy (“IT”) has the second most VC-backed family firms, which takes up 34.22% of all observations. It seems that in our sample, within the scope of family firms, venture capitalists prefer to invest in family firms in Western Europe instead of America or Asia. Interestingly, family firms in China and the US only account for 0.03% and 0.04% in our sample.
Chapter 5. Empirical Results
In this section, statistical results are shown to compare the difference between family firms with venture capital intervention and others that are not.
5.1 Univariate Test
In Table 3, Panel A and Panel B gives us a direct comparison in the key aspects of family firms with regard to VC intervention. It’s easy to notify that venture capital does make a crucial role in family firms’ life. Panel A shows the results of univariate t-test, which bases on the average value of key variables in the sample family firms. Panel B shows the results of univariate t-test, which is based on the median value of key variables in the sample.
Both Panel A and Panel B show similar results. First of all, with VC intervention, family firms tend to expand their firm size more. In the meantime, the liquidity, represented by liquidity ratio and solvency ratio, is higher in VC-backed family firms than those without the intervention of venture capitalists. This is consistent with findings in prior literature that additional external financing could improve the financial condition of family firms, thus especially for financially distressed firms, the support from venture capital could help them increase investment and firm size. Also, the profitability, represented by operating revenue, net income and EBIT is statistically higher for VC-backed family firms than others that are not supported by venture capitalists. This is not only because of the additional financing sources to these family firms particularly in the period of
financial distress, but also due to the governance role of venture capitalists in the life of portfolio companies.
(Insert Table 3 Here)
5.2 The Impact of Venture Capital on Family Firms’ Layoff Decision
To more rigidly test the net impact of venture capital over family firms, I conducted more multivariate tests controlling other firm aspects such as firm size, profitability and liquidity.
Adding more control variables each time into the baseline model, Table 4 gives us a clear impression on the relation between the number of employees and VC intervention in the family firm. We can see from the first two models in Table 4 that, the intervention of venture capitalist is positively correlated with the number of employees in the family firm, which is consistent with the contention that family firms with greater capacity tend to higher more employees to expand their business. However, this coefficient is only marginally significant, and when more control variables are added to the model, the significance goes away. Note that the correlation identified here doesn’t necessarily identify any causal relation. It could either arise from the superior selection of venture capital that choose to invest in larger firms, or that firms with the help from venture capital have better opportunity to expand their business. Alternatively, firms that expand generally have more external financing resources and then mechanically it is more likely that a VC is one of these external investors by chance. More details will be discussed later.
(Insert Table 4 Here)
5.3 The Impact of Venture Capital on Family Firms’ Layoff Decision in Financial Crisis The reason why the significance of the VC coefficient disappear could be that those financial crisis years confound the true effect of venture capital intervention. Therefore, a dummy variable of During Crisis and its interaction with VC is added to the model. Just as expected, Table 5 gives us a clean cut. The existence of venture capital in the family firm is positively correlated with the size of employment in the firm (significant at 5%), and in the year of financial crisis, family firms on average is downsizing. Interestingly, although additional funding from VC could help family firms have more, these VC-backed family firms actually also downsize more in financial crisis years.
Chapter 6. Robustness Check
To further certify the impact of venture capitalists over their portfolio companies, particularly embodied during the 2008-2009 financial crisis, this paper has conducted more robust checks. 6.1 Endogeneity Issue: Propensity Score Matching in Endogeneity
Instead of multivariate testing, propensity score matching is also a delicate technique that could help us clearly identifying the sensitivity of a family firm’s layoff decisions to VC intervention. The treatment group is defined as family firms backed by venture capitalist whose shareholdings in the firm is no less than 5%. The control group is defined as the family firms with venture capitalist’s ownership less than 5% (including none). Nearest neighboring matching is employed as the matching method. Not only the firm year and the country of the firm’s incorporation is controlled, the best matching control firm is identified by firm size, EBIT and liquidity ratio. As shown in Table 6, these matching criteria are met since the value is statistically similar between control group and the treatment. Finally, we could still tell from the row of Employees that the treatment group, namely those family firms with VC intervention, tends to have less compared to their counterpart.
(Insert Table 6 Here) 6.2 Does the Impact of Venture Capital Differ with Firm Size?
As discussed in Table 1, the standard deviation of the key variables in our sample is pretty large. In order address the heterogeneity issue, I therefore divide the sample into two halves, by firm size to check whether the impact of venture capital would differ in family firms with different firm size.
(Insert Table 7 Here)
Table 7 shows that, despite the fact that both large firms and small firms tend to be associated with more people with the support from venture capital, only the layoff decisions in small firms are affected by venture capital during financial crisis years. The coefficient of VC-backed*During Crisis is significantly at 5% level for small firms, which indicates the governance role of venture capital is more effective in small firms. Given the industry experience and power, the impact of venture capital actually decreases with firm age. Also, we can see from the last column of Table 7 that the impact of venture capital in small-sized family firms are more pronounced than large firms, whether it’s in a crisis year or not.
6.3 Does the Impact of Venture Capital Differ with Firm Profitability?
Another subsample test is conducted to test, between profitable firms and underperforming firms, whether the impact of venture capital on the layoff decisions in family firms would differ. As is shown in Table 8, whether there’s any participation of venture capital does not make a significant difference in better-performing family firms, while in underperforming family firms, venture capital intervention does matter. In general, family firms with poor performance have higher chance to be financially distressed. At this time if it gets external financing from venture capital, these family firms funded would increase their investment, including investment in human capital and labor. Therefore, the number of employees would for sure increase with the participation of venture capital, while during financial crisis, these poor firms are also hit more This is
also the time when venture capitalists would step in to take over the governance role and lay off more workers.
Chapter 7. Conclusion
During the past decade, the global capital market has witnessed the increasingly important role of venture capitalists in the life of their portfolio companies. With prevalent understanding in the fact that family firms are under-performing compared to their counterparts, it would be interesting to look at the impact of venture capital in the operation of family firms.
There are mainly three conclusions. First, in times without huge market fluctuation, family firms with support from venture capital tend to be associated with more employees. It can be interpreted as that venture capitalists would expand the operating scope by standardizing the business and structure of the controlled family firms. Second, during financial crisis, venture capitalists are more likely to play a governance role in family firms and layoff more workers. Third, the impact of venture capital is more significant in small and underperforming firms. In hope of a better understanding on the dynamics of family firms, the findings in this paper would contribute to the literature on the social influence of venture capital in modern capital market.
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Appendix Tables
Table 1
Descriptive Statistics on Key VariablesThis table describe the summary statistics of key variables used in the research. Our sample contains 5667 nonfinancial firms around the world, and the data ranges from 2006 to 2009. Firm size is measured in the logarithm form of total asset in the firm. Similarly, logarithm is also taken to measure firm’s annual operating income, net income, Number of Employees and EBIT (i.e. earnings before interest and taxes). To measure the firm’s financial conditions, this paper employs liquidity ratio as well as solvency ratio and both ratios are measured in percentage.
Variable N Mean 25th Median 75th SD
Firm size 105100 11.161 8.082 8.972 9.843 14.083 Operating Revenue 105100 11.120 8.360 9.154 10.016 13.861 Net Income 105100 15.375 25.341 118.304 495.573 566.358 Liquidity Ratio 105100 1.410 0.671 0.990 1.494 2.286 EBIT 105100 4.347 0.874 3.365 10.163 7.057 Solvency Ratio 105100 35.178 17.713 31.948 50.443 22.927 # of Employees 105100 5.616 3.367 3.738 4.317 8.514
Table 2
Distribution of VC-backed Family Firms, by CountryThis table shows the distribution of venture-backed family firms across the world in each country. The country name has been abbreviated for simplicity. For example, AT-Austria, AU-Australia and CN is for China.
Country Freq. Percent Country Freq. Percent
AT 8 0.01 CN 28 0.03 AU 32 0.03 CZ 556 0.53 BA 24 0.02 DE 6,660 6.34 BE 464 0.44 DK 44 0.04 BG 280 0.27 EE 52 0.05 BM 80 0.08 ES 45,616 43.4 CH 96 0.09 FI 332 0.32 IL 20 0.02 FR 1,572 1.5 IN 12 0.01 GB 2,472 2.35 IS 20 0.02 GR 32 0.03 IT 35,964 34.22 HK 12 0.01 KR 16 0.02 HR 16 0.02 KY 52 0.05 HU 8 0.01 LU 4 0 IE 300 0.29 MY 32 0.03 SE 668 0.64 NL 48 0.05 SG 20 0.02 NO 20 0.02 SI 40 0.04 NZ 4 0 SK 192 0.18 PL 396 0.38 TW 60 0.06 PT 8,320 7.92 UA 328 0.31 RS 160 0.15 US 40 0.04
Table 3
Comparison of Key Variables between VC-backed and Non-VC backed Firms This table compares the key accounting variables during our sample period between family firms that are supported by venture capitalists and those which are not. Panel A shows the univariate test based on the average value of the key variables (t-test) and Panel B shows the univariate test based on the median value of the key variables (z-test).Panel A
Variable VC-backed Non-VC-backed Diff. t-test
Firm size 13.232 10.011 3.221 0.000 Operating Revenue 12.848 12.336 0.512 0.886 Net Income 16.911 15.369 1.542 0.002 Liquidity Ratio 1.751 0.973 0.778 0.000 EBIT 6.269 5.554 0.715 0.042 Solvency Ratio 38.334 37.010 1.324 0.051 # of Employees 7.707 5.088 2.619 0.002
Panel B
Variable VC-backed Non-VC-backed Diff. z-test
Firm size 13.233 10.438 2.795 0.000 Operating Revenue 12.646 12.223 0.423 0.930 Net Income 16.564 15.343 1.221 0.019 Liquidity Ratio 1.265 0.881 0.384 0.000 EBIT 6.644 5.639 1.005 0.015 Solvency Ratio 38.346 37.000 1.346 0.044 # of Employees 1.813 1.613 0.200 0.021
Table 4 T
he Impact of Venture Capital on Family Firms’ Layoff DecisionThis table exhibits the impact of venture capital, on average, over the layoff decisions of family firms. In the panel data, Employees is the logarithm form of the number of the employees in the firm. Similarly, Firm size, measured by total assets (in million dollars) as well as operating revenue, net income and EBIT is measured in logarithm form.VC-backed is a dummy equal to 1 if at least one venture capitalist hold shares in the firm. In terms of firm’s financial capacity, liquidity ratio measures the ratio between the liquid assets and the liabilities of a firm. Solvency ratio is a key metric used to measure an enterprise's ability to meet its debt and other obligations. The solvency ratio indicates whether a company's cash flow is sufficient to meet its short-term and long-term liabilities. The significance of each coefficient is marked with asteroids, with *, ** and *** featuring the significance of coefficient at 10%, 5% and 1% level respectively. Standard error is shown in the parentheses below the coefficient.
(1) (2) (3) (4)
Employees Employees Employees Employees
VC backed 0.062* 0.062* 0.065 0.065 (0.64) (0.64) (0.63) (0.63) Frim Size 0.041*** 0.015*** 0.009*** (0.00) (0.00) (0.02) Operating Revenue 0.005 0.003 (5.44) (5.56) Net Income 0.019*** 0.023*** (0.00) (0.00) Liquidity Ratio -0.960 -0.434 (2.36) (2.38) EBIT 0.029*** (0.00) Solvency Ratio -0.615 (0.47) Constant 2.745*** 2.717*** 2.433*** 2.606** (0.08) (0.08) (0.09) (0.18)
Country Fixed Effect YES YES YES YES
Adjusted R^2 0.069 0.200 0.423 0.389
Table 5
The Impact of Venture Capital on Family Firms’ Layoff Decision in Financial Crisis This table exhibits the impact of venture capital, on average, over the layoff decisions of family firms. In the panel data, Employees is the logarithm form of the number of the employees in the firm. Similarly, Firm size, measured by total assets (in million dollars) as well as operating revenue, net income and EBIT is measured in logarithm form. VC-backed is a dummy equal to 1 if at least one venture capitalist hold shares in the firm. During_Crisis is a dummy equal to 1 if the observation year is 2008 or 2009, otherwise zero. VC-backed*During Crisis is an interaction term between VC-backed and During Crisis, which equals 1 if there’s VC intervention in the firm at the occurrence of financial crisis. As for firm’s financial capacity, liquidity ratio measures the ratio between the liquid assets and the liabilities of a firm. Solvency ratio is a key metric used to measure an enterprise's ability to meet its debt and other obligations. The solvency ratio indicates whether a company's cash flow is sufficient to meet its short-term and long-term liabilities. The significance of each coefficient is marked with asteroids, with *, ** and *** featuring the significance of coefficient at 10%, 5% and 1% level respectively. Standard error is shown in the parentheses.(1) (2) (3) (4)
Employees Employees Employees Employees
VC backed 0.086*** 0.086*** 0.087*** 0.067** (0.03) (0.03) (0.03) (0.03) During Crisis -1.012 -1.283** -1.017** 2.491 (1.07) (1.74) (1.73) (1.02) VC-backed*During Crisis -0.316*** -0.316*** -0.307** -0.301** (0.02) (0.02) (0.29) (0.27) Frim Size 0.034*** 0.025*** 0.029*** (0.00) (0.00) (0.02) Operating Revenue 0.009 0.006 (5.24) (5.06) Net Income 0.039*** 0.025*** (0.00) (0.00) Liquidity Ratio -0.947 -0.414 (2.88) (4.37) EBIT 0.031*** (0.00) Solvency Ratio -0.818 (1.29) Constant 2.811*** 2.788*** 2.465** 2.506** (0.04) (0.04) (0.09) (0.18)
Country Fixed Effect YES YES YES
Adjusted R^2 0.129 0.201 0.439 0.444
Table 6 Robustness Test: Propensity Score Matching
This paper employs propensity score matching method (PSM) to measure the propensity of VC intervention in a family firm in 42 countries in the sample. ATT means average treatment effect on the treatment group. The treatment group is defined as family firms backed by venture capitalist whose shareholdings in the firm is no less than 5%. The control group is defined as the family firms with venture capitalist’s ownership less than 5% (including none). Nearest neighbouring matching is employed as the matching method.
# of Treatment # of Control ATT Sd. P-Value
Firm Size 5147 5254 -0.103 0.003 0.353
EBIT 5147 5837 -0.101 0.003 0.329
Liquidity Ratio 5141
5927 -0.001 0.005 0.162
Financial Crisis and Country 5667
5667 Controlled Controlled /
Table 7
Does the Impact of Venture Capital Differ with Firm Size?This table exhibits the impact of venture capital, on average, over the layoff decisions of family firms. In the panel data, Employees is the logarithm form of the number of the employees in the firm. Similarly, Firm size, measured by total assets (in million dollars) as well as operating revenue, net income and EBIT is measured in logarithm form. VC-backed is a dummy equal to 1 if at least one venture capitalist hold shares in the firm. During Crisis is a dummy equal to 1 if the observation year is 2008 or 2009, otherwise zero. VC-backed*During Crisis is an interaction term between VC-backed and During Crisis, which equals 1 if there’s VC intervention in the firm at the occurrence of financial crisis. As for firm’s financial capacity, liquidity ratio measures the ratio between the liquid assets and the liabilities of a firm. Solvency ratio is a key metric used to measure an enterprise's ability to meet its debt and other obligations. The solvency ratio indicates whether a company's cash flow is sufficient to meet its short-term and long-term liabilities. The significance of each coefficient is marked with asteroids, with *, ** and *** featuring the significance of coefficient at 10%, 5% and 1% level respectively. Standard error is shown in the parentheses.
Employees
Firm Size Top 1/2 Bottom 1/2
P-value of Coefficient Difference VC backed 0.048* 0.131*** 0.001 (0.33) (0.04) During Crisis -1.017** -1.241* 0.108 (1.83) (1.12) VC-backed*During Crisis -0.031 -0.381** 0.000 (-1.29) (0.11) Operating Revenue 0.029 1.083*** 0.000 (4.22) (0.05) Net Income 0.039 0.751*** 0.000 (3.00) (0.07) Liquidity Ratio -0.926 -0.854 0.837 (2.78) (4.76) EBIT 0.031* 0.277*** 0.000 (0.04) (0.11) Solvency Ratio -0.718 -0.680 0.118 (1.99) (1.29) Constant 2.365** 1.525* 0.774 (0.19) (1.71)
Country Fixed Effect YES YES
Adjusted R^2 0.113 0.316
Table 8
Does the Impact of Venture Capital Differ with Firm Profitability?This table exhibits the impact of venture capital, on average, over the layoff decisions of family firms. In the panel data, Employees is the logarithm form of the number of the employees in the firm. Similarly, Firm size, measured by total assets (in million dollars) as well as operating revenue, net income and EBIT is measured in logarithm form. VC-backed is a dummy equal to 1 if at least one venture capitalist hold shares in the firm. During Crisis is a dummy equal to 1 if the observation year is 2008 or 2009, otherwise zero. VC-backed*During Crisis is an interaction term between VC-backed and During Crisis, which equals 1 if there’s VC intervention in the firm at the occurrence of financial crisis. As for firm’s financial capacity, liquidity ratio measures the ratio between the liquid assets and the liabilities of a firm. Solvency ratio is a key metric used to measure an enterprise's ability to meet its debt and other obligations. The solvency ratio indicates whether a company's cash flow is sufficient to meet its short-term and long-term liabilities. The significance of each coefficient is marked with asteroids, with *, ** and *** featuring the significance of coefficient at 10%, 5% and 1% level respectively. Standard error is shown in the parentheses.
Employees
EBIT Top 1/2 Bottom 1/2
P-value of Coefficient Difference VC backed 0..016 0.196** 0.002 (3.33) (0.10) During Crisis -0.055* -0.817*** 0.000 (0.07) (0.13) VC-backed*During Crisis -0.225 -1.110*** 0.000 (0.47) (0.33) Firm Size 0.019* 0.026** 0.092 (0.01) (0.00) Operating Revenue 0.489 0.406 1.034 (5.11) (5.23) Net Income 0.339 0.325 1.383 (2.00) (2.24) Liquidity Ratio -0.883 -0.612 0.832 (2.11) (4.02) Solvency Ratio -0.739 -0.001 0.787 (2.88) (2.29) Constant 2.465** 8.979** 2.921 (1.22) (4.18)
Country Fixed Effect YES YES
Adjusted R^2 0.220 0.315
