Venture capital financing and the financial distress risk of portfolio firms: How independent and bank-affiliated investors differ

We analyze a sample of European high-tech entrepreneurial firms that received bank venture capital (BVC) financing between 1994 and 2004. We employ a "two-step" matching procedure in order to build a control group composed of (1) comparable firms that received venture capital financing from independent investors (IVCs) and (2) comparable non-invested firms. The econometric analyses suggest that BVC investors are interested in the financial risk profile of the firms they invest in. In fact, before the first round of financing, BVC-backed firms show a lower risk of financial distress than both IVC-backed firms and non-invested firms. However, after the investment, BVC-backed firms exhibit a significant increase in debt exposure, compared to non-invested firms.