Government as a Source of Equity Capital for Entrepreneurs: Evidence From Entrepreneurial Exits

ABSTRACT Research Question/Issue We examine the effect of government equity investment on the dollar value of entrepreneurial exits spanning 50 countries over the years 1990–2015. Research Findings/Insights Data on 8532 entrepreneurial exits indicate that, relative to exits in which the investor base is purely nongovernment, private firm exits with government equity investment have higher dollar exit values. Subsample analysis suggests that the exits via initial public offerings (IPOs) drive these results with an average associated increase in IPO proceeds of $192.49 million. The positive impact of government is more pronounced when access to entrepreneurial capital is limited and for limited partnership venture capital structures. Theoretical/Academic Implications Research on government equity investment has suggested inefficiencies that lead to the deterioration of corporate value. Conversely, government equity investment can provide a valuable source of capital to some firms when investors, for example, venture capitalists, are unable or unwilling to invest. Our paper sheds light on whether government equity investment can provide value to small private firms, a subset of firms that is typically financially constrained, and how they might enhance exit value. Practitioner/Policy Implications Our results suggest that governments enhance value when they provide capital in times/places where capital is scarce and government investors do not actively manage entrepreneurial firms.