Does Venture Capital affect capital structure rebalancing? The case of small knowledge-intensive service firms

Abstract

This study analyses small knowledge-intensive service (SKIS) firms’ capital structure rebalancing, before and after Venture Capital (VC) entry. We use data for a sample of 1161 Western European SKIS firms, for the period 2006–2015. Two sub-samples were created: one composed of firms before VC entry; the other composed of SKIS firms after VC treatment. We use panel data models and the system GMM (1998) dynamic estimator. The results obtained suggest that after VC entry, SKIS firms are close to the predictions of the pecking order theory. Therefore, SKIS firms after VC participation on firm equity, probably become less dependent on debt, choosing internal finance to fund assets that are firm-specific or have an intangible nature, and, hence cannot be pledged as collaterals.