nep-eec New Economics Papers
on European Economics
Issue of 2009‒06‒10
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The European market for wooden furniture components By Alessandra Tracogna; Michela Parziale; Paolo Gardino; Anna Ruvolo
  2. Price convergence in the EMU? Evidence from micro data By Fischer, Christoph
  3. Fiscal sustainability and policy implications for the euro area By Balassone, Fabrizio; Cunha, Jorge Correia da; Langenus, Geert; Manzke, Bernhard; Pavot, Jeanne; Prammer, Doris; Tommasino, Pietro
  4. Shareholder Activism through Proxy Proposals: The European Perspective By Cziraki, P.; Renneboog, L.D.R.; Szilagyi, P.G.
  5. Substitution and technological change under carbon cap and trade : lessons from Europe By Considine , Timothy J.; Larson, Donald F.
  6. Towards a Framework for Assessing Family Policies in the EU By Henning Lohmann; Frauke H. Peter; Tine Rostgaard; Katharina Spiess
  7. MIDAS versus mixed-frequency VAR: nowcasting GDP in the euro area By Kuzin, Vladimir; Marcellino, Massimiliano; Schumacher, Christian
  8. Background Paper: Investment Liberalization in the EU-ASEAN FTA By Ignacio Jose Minambres
  9. Investment Risk and Pensions: Impact on Individual Retirement Incomes and Government Budgets By Edward R. Whitehouse; Anna Christina d'Addio; Andrew Reilly
  10. An Innovative Tool to Assess Marketing Capabilities of Traditional Producers within the European Food Industry By Banterle, Alessandro; Carraresi, Laura; Stranieri, Stefanella
  11. Inequality Trends in Sweden 1978-2004 By Domeij, David; Floden, Martin
  12. The Importance of Trust for Investment: Evidence from Venture Capital By Bottazzi, L.; Da Rin, M.; Hellmann, T.
  13. Pooling versus model selection for nowcasting with many predictors: an application to German GDP By Kuzin, Vladimir; Marcellino, Massimiliano; Schumacher, Christian
  14. To Be Financed or Not… : The Role of Patents for Venture Capital Financing By Haeussler, Carolin; Harhoff, Dietmar; Mueller, Elisabeth

  1. By: Alessandra Tracogna (CSIL Centre for Industrial Studies); Michela Parziale (CSIL Centre for Industrial Studies); Paolo Gardino (Gardino Consulting); Anna Ruvolo (Gardino Consulting)
    Abstract: The European production of furniture components is worth about Euro 5,200 million. Italy is the leading European producer, exporter, and consumer, while Germany - being the main furniture producer in Europe - is the leading importer of furniture components. This report provides trends in production and consumption of furniture components in 6 European countries (France, Germany, Italy, Poland, Spain, United Kingdom) and in the Nordic-Scandinavian Area. It also covers imports and exports, sectors of destinations, distribution channels, environmental certification. For all those regions, the report provides a breakdown of production by product type (bars, cabinet doors, drawers, frames, worktops, others ), by sector of destination (office furniture, kitchen and bathroom furniture, dining, living and bedroom furniture), by support material (wood, MDF, particle board, plywood, other materials), by wood species, and by coating material (veneer, melamine foils, laminates, PVC, lacquered). As far as raw materials are concerned, the report provides data on European production, consumption, imports and exports of particleboard panels, also considering other wood-based panels (MDF, plywood, fibre board panels). The report provides also data about the sectors of destinations of particle board and MDF. A complete picture of the main sectors of destination of furniture components is provided: detailed production data are available for office furniture, kitchens and other household furniture, RTA furniture, as well as data on main manufacturers. The European competitive system is analysed, with the available data on the main furniture components' manufacturers (sales, employees).
    JEL: L11 L22 L68
    Date: 2008–12
  2. By: Fischer, Christoph
    Abstract: The establishment of European monetary union (EMU) was widely expected to cause price convergence among member states. In an investigation of this claim, the present study avoids problems of comparability and representativeness by using an extremely detailed and comprehensive scanner database on washing machine prices and sales volumes for 17 European countries. A hedonic regression yields country-specific time series for quality-adjusted price differentials. Statistically and economically significant deviations from the LOP emerge. Log t tests firmly reject price convergence among EMU countries. Small convergence clusters can be identified but they are unrelated to EMU membership.
    Keywords: price convergence, LOP, euro introduction, log t test, hedonic price regression, scanner data
    JEL: C23 E31 F31 F36 L68
    Date: 2009
  3. By: Balassone, Fabrizio; Cunha, Jorge Correia da; Langenus, Geert; Manzke, Bernhard; Pavot, Jeanne; Prammer, Doris; Tommasino, Pietro
    Abstract: In this paper we examine the sustainability of euro area public finances against the backdrop of population ageing. We critically assess the widely used projections of the Working Group on Ageing Populations (AWG) of the EU's Economic Policy Committee and argue that ageing costs may be higher than projected in the AWG reference scenario. Taking into account adjusted headline estimates for ageing costs, largely based upon the sensitivity analysis carried out by the AWG, we consider alternative indicators to quantify sustainability gaps for euro area countries. With respect to the policy implications, we assess the appropriateness of different budgetary strategies to restore fiscal sustainability taking into account intergenerational equity. Our stylised analysis based upon the lifetime contribution to the government's primary balance of different generations suggests that an important degree of pre-funding of the ageing costs is necessary to avoid shifting the burden of adjustment in a disproportionate way to future generations. For many euro area countries this implies that the medium-term targets defined in the context of the revised stability and growth pact would ideally need to be revised upwards to significant surpluses.
    Keywords: population ageing, fiscal sustainability, generational accounting, medium-term objectives for fiscal policy
    JEL: H55 H60
    Date: 2009
  4. By: Cziraki, P.; Renneboog, L.D.R.; Szilagyi, P.G. (Tilburg University, Center for Economic Research)
    Abstract: This paper is the first to investigate the corporate governance role of shareholderinitiated proxy proposals in European firms. While proposals in the US are nonbinding even if they pass the shareholder vote, they are legally binding in the UK and most of Continental Europe. Nonetheless, submissions remain relatively infrequent in Continental Europe in particular, with major variations across countries in ownership structures, monitoring incentives, and the laws and regulations governing shareholder access to the proxy. We use sample selection models to analyze target selection and proposal success in terms of the voting outcomes and the stock price effects, and make several contributions to the literature. First, proposal submissions remain infrequent compared to the US in Continental Europe in particular. In the UK proposals typically relate to a proxy contest seeking board changes, while in Continental Europe they are more focused on specific governance issues. Second, there is some evidence that the proposal sponsors are valuable monitors, because the target firms tend to underperform and have low leverage. The sponsors also observe the identity of the voting shareholders, because proposal probability increases in the target’s ownership concentration and the equity stake of institutional investors. Third, while proposals enjoy limited voting success across Europe, they are relatively more successful in the UK. The outcomes are strongest for proposals targeting the board but are also affected by the target characteristics including the CEO’s pay-performance sensitivity. Finally, proposals are met with strong negative stock price effects when they are voted upon at general meetings. This suggests that rather than attribute them control benefits, the market often interprets proposals and their failure to pass the vote as a negative signal of governance concerns. Indeed, the market responds better to proposals submitted against large firms with low leverage, which is consistent with agency considerations. However, the stock price effects are most negative for poorly performing firms with low market-to-book ratios, which implies that the proposal outcomes only intensify the market’s concerns over firms that have previously underperformed.
    Keywords: Shareholder activism;shareholder proposals;corporate governance;sample selection.
    JEL: G34
    Date: 2009
  5. By: Considine , Timothy J.; Larson, Donald F.
    Abstract: The use of carbon-intense fuels by the power sector contributes significantly to the greenhouse gas emissions of most countries. For this reason, the sector is often key to initial efforts to regulate emissions. But how long does it take before new regulatory incentives result in a switch to less carbon intense fuels? This study examines fuel switching in electricity production following the introduction of the European Union’s Emissions Trading System, a cap-and-trade regulatory framework for greenhouse gas emissions. The empirical analysis examines the demand for carbon permits, carbon based fuels, and carbon-free energy for 12 European countries using monthly data on fuel use, prices, and electricity generation. A short-run restricted cost function is estimated in which carbon permits, high-carbon fuels, and low-carbon fuels are variable inputs, conditional on quasi-fixed carbon-free energy production from nuclear, hydro, and renewable energy capacity. The results indicate that prices for permits and fuels affect the composition of inputs in a statistically significant way. Even so, the analysis suggests that the industry’s fuel-switching capabilities are limited in the short run as is the scope for introducing new technologies. This is because of the dominant role that past irreversible investments play in determining power-generating capacity. Moreover, the results suggest that, because the capacity for fuel substitution is limited, the impact of carbon emission limits on electricity prices can be significant if fuel prices increase together with carbon permit prices. The estimates suggest that for every 10 percent rise in carbon and fuel prices, the marginal cost of electric power generation increases by 8 percent in the short run. The European experience points to the importance of starting early down a low-carbon path and of policies that introduce flexibility in how emission reductions are achieved.
    Keywords: Energy Production and Transportation,Energy and Environment,Environment and Energy Efficiency,Carbon Policy and Trading,Markets and Market Access
    Date: 2009–06–01
  6. By: Henning Lohmann; Frauke H. Peter; Tine Rostgaard; Katharina Spiess
    Abstract: This report presents the results of a first attempt to create a framework for assessing the performance of national family policies. The report is part of a joint EU and OECD project, which aims to help the EU Government Expert Group on Demographic Issues in evaluating national family policies. The idea behind the framework is that it allows individual countries to compare their overall performance in the area of family policies with the performance of other countries. The main focus of the report is policies for families with smaller children. The framework provides a set of cross-nationally comparable indicators on contexts, policy measures, and outcomes, organised on a systematic basis. The policy measure indicators presented in the report cover leave schemes, early childhood education and care, family benefits and workplace policies. The indicators build upon, inter alia, previous work by the OECD in various studies on family-friendly policies that were carried out on a cross-national basis using different sets of indicators. Most of these indicators are today available in the OECD Family Database. Wherever the OECD Family Database contains indicators for the majority of EU member states and OECD countries, these data have been used in the present study. Otherwise, data from other cross-national databases have been included. Each indicator in the framework is presented as a single-standing indicator in the general absence of scientific consensus on different aggregation weights. In the report no explicit ranking of countries has been attempted, instead the relative position of countries has been illustrated with the help of standard deviation scores. In the last part of the report the linkages between policy aims and the various context, outcome and policy measures are indicated, which help construct “score cards”. This “score card-approach” is illustrated for three countries: Denmark, Germany and the United Kingdom. The report offers tools for assessment that may be developed further, and should offer an approach to using the OECD Family Database, acknowledging this unique data source for cross-country comparisons in the field of family policy.<BR>Ce rapport présente les résultats d’une première tentative d’élaborer un cadre d’évaluation de la performance des politiques nationales en faveur des familles. Ce rapport fait partie d’un projet élaboré conjointement par l’Union européenne et l’OCDE, qui vise à aider le groupe d’experts gouvernementaux sur les sujets démographiques de l’UE pour évaluer les politiques nationales d’aides aux familles. L’idée sous-jacente est de permettre à chaque pays de comparer ses performances avec celles des autres pays. Les familles avec de jeunes enfants sont le principal sujet d’analyse de ce rapport. Le cadre élaboré propose un ensemble d’indicateurs comparables entre pays sur les contextes, les mesures politiques et les résultats, organisés sur une base systématique. Les indicateurs de mesures politiques couvrent les dispositifs de congé, d’aides à l’éducation et aux soins accordées à la petite enfance, les prestations financières et les politiques liées au lieu de travail. Ces indicateurs ont été élaborés, inter alia, à partir des travaux antérieurs de l’OCDE sur les politiques favorables aux familles qui ont été conduites de manière comparative sur la base de différents ensembles d’indicateurs. La plupart de ces indicateurs sont aujourd’hui disponibles au sein de la base de données OCDE sur les Familles. Ces indicateurs ont été inclus pour la majorité des pays de l’UE et de l’OCDE pour lesquels ils sont disponibles. Lorsqu’ils n’étaient pas disponibles, des données provenant de bases internationales ont été prises en compte. Chaque indicateur est présenté ici de façon séparée, car il n’y a pas de consensus scientifique sur la pondération qui permettrait de les agréger. Aucun classement explicite des pays n’a été tenté ici ; la position relative des pays est, au contraire, illustrée au moyen de scores d’écarts-types. Dans la dernière partie du rapport, les liens entre les objectifs politiques et les variables de contexte de résultats et de mesures politiques sont pris en compte pour élaborer des « cartes de score ». Cette approche par « cartes de scores » est illustrée pour trois pays : le Danemark, l’Allemagne et le Royaume-Uni. Ce rapport offre des outils d’évaluation qui pourront être encore développés, et devrait offrir une approche de la manière d’utiliser la base de données de l’OCDE sur les Familles, qui constitue une source de données incontournable pour faire des comparaisons internationales dans le champ des politiques familiales.
    Keywords: prestations familiales, family benefits, early childhood education and care, éducation et accueil des jeunes enfants, workplace policies, lieu de travail, parental leave schemes, régimes de congé parental
    JEL: H2 H4 I1 I2 I3 J13 J18 J2 J3
    Date: 2009–06–03
  7. By: Kuzin, Vladimir; Marcellino, Massimiliano; Schumacher, Christian
    Abstract: This paper compares the mixed-data sampling (MIDAS) and mixed-frequency VAR (MF-VAR) approaches to model speci…cation in the presence of mixed-frequency data, e.g., monthly and quarterly series. MIDAS leads to parsimonious models based on exponential lag polynomials for the coe¢ cients, whereas MF-VAR does not restrict the dynamics and therefore can su¤er from the curse of dimensionality. But if the restrictions imposed by MIDAS are too stringent, the MF-VAR can perform better. Hence, it is di¢ cult to rank MIDAS and MF-VAR a priori, and their relative ranking is better evaluated empirically. In this paper, we compare their performance in a relevant case for policy making, i.e., nowcasting and forecasting quarterly GDP growth in the euro area, on a monthly basis and using a set of 20 monthly indicators. It turns out that the two approaches are more complementary than substitutes, since MF-VAR tends to perform better for longer horizons, whereas MIDAS for shorter horizons.
    Keywords: nowcasting, mixed-frequency data, mixed-frequency VAR, MIDAS
    JEL: C53 E37
    Date: 2009
  8. By: Ignacio Jose Minambres
    Abstract: The EU is undoubtedly pursuing the maximum investment liberalisation at all costs. The actual measures that some ASEAN countries have taken in the past could hardly fit into many of the FTAs signed to date with other developing countries. Although ASEAN countries are trying to hold a position in their talks with the EU of not signing any agreement that would require them to change their existing laws, it is unclear whether those countries that agree to a lower standard in their service schedules or in investment and capital controls will find their hands tied when some situation arises that would require them to adopt restrictive policies on such flows.[FGS OP NO 5]
    Keywords: Foreign direct investment; UNCTAD; Intellectual property rights; EU; Bilateral FTAs; Global Europe: Competing in the World; ASEAN; EU-ASEAN FTA
    Date: 2009
  9. By: Edward R. Whitehouse; Anna Christina d'Addio; Andrew Reilly
    Abstract: The current financial and economic crisis has highlighted the importance of investment risk for pension systems. In particular, the dramatic spread of defined-contribution pension provision around the world means that investment risk has a direct effect on living standards in old age. This paper explores how uncertainty over investment returns affects individuals’ retirement incomes and government budgets. The key finding is that public pensions, old-age safety net benefits and the tax system act as “automatic stabilisers” of retirement incomes in the face of investment risk in defined-contribution pension plans. However, the degree of protection offered by these policies, and therefore the exposure of individuals’ retirement incomes to investment risk, varies significantly between countries. The paper uses the OECD pension models to explore the implications of a range of possible outcomes for investment returns. (The distribution of investment returns used is derived from historical data in D’Addio, Seisdedos and Whitehouse, 2009.) The analysis begins with the individual pension-scheme member. The results demonstrate that the overall design of the retirement-income package must be taken into account when assessing exposure of individual incomes in old age to investment performance. Many elements of pension systems are not subject to investment risk. And resource-tested benefits can act to mitigate investment risk by paying a larger benefit when returns are poor. Analysis of net pensions shows how taxes can also act to offset the effect of investment risk on living standards in retirement. The differences between countries in the extent to which these different factors affect exposure to investment risk are huge. Together, taxes and meanstested benefits can be termed “automatic stabilisers” for retirement incomes in the face of investment risk. Secondly, the paper uses the OECD pension models to look at the impact of investment risk on the public finances. The corollary of the reduction in investment risk for individuals through tax and transfer policies is exposure to investment risk of the public finances. In countries with resource-tested benefits, the government has a “contingent liability” that depends on investment returns. Better performance means lower expenditure on safety-net benefits. Similarly, the tax system means that the government is effectively a “co-investor”, with the individual retiree, in the defined-contribution plan. Higher returns mean more tax revenues. This effect is particularly large where the tax burden on pensions in payment is high. Adding these two effects together, governments (and so taxpayers) are in many countries significantly exposed to investment risk. This demonstrates how it is impossible to make risks go away: it is only possible to reallocate the risk between different actors in the pension system.<BR>L’actuelle crise financière et économique a mis en évidence l’importance du risque d’investissement pour les systèmes de retraite. En particulier, la propagation dramatique des régimes à cotisations définies à travers le monde implique que le risque d’investissement a un effet direct sur le niveau de vie des individus pendant la retraite. Ce document analyse comment l’incertitude sur les rendements des investissements affecte les revenus de retraite des individus et les budgets des gouvernements. La conclusion principale est que les pensions publiques, les filets de sécurité mis en place pour les personnes âgées et le système fiscal jouent le rôle de « stabilisateurs automatiques » des revenus de retraite face au risque d’investissement dans des plans de retraite à cotisations définies. Cependant, le degré de protection offert par ces politiques, et donc l’exposition au risque d’investissement des revenus de retraite individuels, varie de manière significative entre les pays. Le document utilise les modèles de pension de l’OCDE pour étudier les implications associées à une gamme de rendements des placements. (La distribution des rendements d’investissement utilisée est dérivée des données historiques selon la procédure illustrée dans D’Addio, Seisdedos et Whitehouse, 2009). L’analyse se concentre en premier lieu sur les revenus de retraites des individus. Les résultats démontrent que la conception globale de l’ensemble des revenus de retraite doit être prise en compte lors de l’évaluation de l’exposition aux performances des investissements des revenus individuels de retraite. De nombreux éléments des systèmes de retraite ne sont pas sujets au risque d’investissement. Et les prestations sous condition de ressources peuvent atténuer le risque d’investissement moyennant le paiement d’une prestation plus élevée lorsque les rendements sont faibles. L’analyse des revenus de retraites nets d’impôts montre comment ces derniers peuvent également contribuer à compenser l’effet du risque d’investissement sur le niveau de vie pendant la retraite. Les différences entre les pays dans la mesure où ces différents facteurs influent sur l’exposition au risque d’investissement sont énormes. Ensemble, les taxes et les prestations sous conditions de ressources peuvent être qualifiées de « stabilisateurs automatiques » pour les revenus de retraite face au risque d’investissement. Deuxièmement, le document utilise des modèles de pension de l’OCDE pour examiner l’impact du risque d’investissement sur les finances publiques. Le corollaire de la réduction de risque d’investissement pour les particuliers par le biais de politiques fiscales et de transfert est l’exposition aux risques d’investissement des finances publiques. Dans les pays qui ont mis en place des prestations sous condition de ressources, le gouvernement a un « passif » qui dépend du rendement du capital investi. Une meilleure performance signifie la baisse des dépenses pour des filets de sécurité. De même, le système fiscal implique que le gouvernement est effectivement un « co-investisseur », avec les retraités, dans le plan à cotisations définies. Des rendements plus élevés, impliquent des recettes fiscales plus élevées. Cet effet est particulièrement important lorsque la charge fiscale sur les droits à pension est élevée. La somme de ces deux effets signifie finalement que, les gouvernements (et donc les contribuables) sont fortement exposés au risque d’investissement dans de nombreux pays. Cela montre pourquoi et à quel point il est impossible de faire disparaître les risques : il est seulement possible de redistribuer ces risques entre les différents acteurs du système de retraite.
    Keywords: pensions, pensions de retraite, retour sur investissement, investment return
    JEL: D14 G11 G23
    Date: 2009–06–05
  10. By: Banterle, Alessandro; Carraresi, Laura; Stranieri, Stefanella
    Abstract: The purpose of this paper is to assess the marketing management capabilities of SMEs producing traditional food products in EU throughout the development of a benchmarking tool. SMEs represent the greater part of European food firms and they find it very difficult to adapt to market changes, and to compete with big enterprises. In this context, marketing management plays a key role in good SMEs performances in the market. The benchmarking tool, utilised to assess marketing capabilities, is aimed at improving critical points in the marketing area of traditional food firms by following the example of the best ones. This method is developed in the innovative form of an interactive questionnaire published on the Web. At the moment the sample is composed by 60 firms located in three member states (Belgium, Italy, and Hungary) producing traditional food products belonging to five sectors (cheese, beer, dry ham, sausage and white pepper). The data were analysed with cluster analysis. Results show that the majority of firms is weak in marketing research, and also the marketing strategy is not well developed. On the other hand, stronger performance is shown in innovation. Related to the size and production, generally, micro sized firms perform worse than small and medium enterprises, and the production of PDO-PGI products affects positively the marketing capabilities.
    Keywords: marketing capabilities, traditional food, benchmarking, cluster analysis, Agribusiness, Agricultural and Food Policy, Farm Management, Food Consumption/Nutrition/Food Safety, Industrial Organization, L25, L66, M31, Q13,
    Date: 2008–10
  11. By: Domeij, David (Dept. of Economics, Stockholm School of Economics); Floden, Martin (Dept. of Economics, Stockholm School of Economics)
    Abstract: We document a clear increase in Swedish earnings inequality in the early 1990s. Inequality in disposable income and earnings net of taxes and transfers also increased, but much less than the increased inequality in pre-government earnings. These different developments are most likely explained by the generous Swedish welfare system. Consistent with these observations, we see no clear trend in consumption inequality. We also estimate stochastic processes for household earnings. A simple random-walk process captures much of the life-cycle dynamics. But we find clear evidence that the true earnings process is not a random walk. We demonstrate that some estimation methods result in severe upward bias in the estimated volatility of permanent shocks if serial correlation in temporary shocks is ignored. Our estimation results show that the increase in earnings inequality is almost entirely driven by an increase in residual earnings inequality. Moreover, this increase was mostly generated by an increased volatility of persistent shocks.
    Keywords: income inequality; consumption inequality; stochastic earnings process
    JEL: D31 D33 E24 J31
    Date: 2009–05–20
  12. By: Bottazzi, L.; Da Rin, M.; Hellmann, T. (Tilburg University, Center for Economic Research)
    Abstract: We examine the effect of trust on financial investment and contracting decisions in a micro-economic environment where trust is exogenous. Using hand-collected data on European venture capital, we show that the Eurobarometer measure of trust among nations significantly affects investment decisions. This holds even after controlling for investor and company fixed effects, geographic distance, information and transaction costs. The national identity of venture capital firms’ individual partners further contributes to the effect of trust. Education and work experience reduce the effect of trust but do not eliminate it. We also examine the relationship between trust and sophisticated contracts involving contingent control rights and find that, even after controlling for endogeneity, they are complements, not substitutes.
    Keywords: Venture Capital;Social Capital;Trust;Financial Contracts;Corporate Governance.
    JEL: G24 G34 K22 M13
    Date: 2009
  13. By: Kuzin, Vladimir; Marcellino, Massimiliano; Schumacher, Christian
    Abstract: This paper discusses pooling versus model selection for now- and forecasting in the presence of model uncertainty with large, unbalanced datasets. Empirically, unbalanced data is pervasive in economics and typically due to di¤erent sampling frequencies and publication delays. Two model classes suited in this context are factor models based on large datasets and mixed-data sampling (MIDAS) regressions with few predictors. The specification of these models requires several choices related to, amongst others, the factor estimation method and the number of factors, lag length and indicator selection. Thus, there are many sources of mis-specification when selecting a particular model, and an alternative could be pooling over a large set of models with different specifications. We evaluate the relative performance of pooling and model selection for now- and forecasting quarterly German GDP, a key macroeconomic indicator for the largest country in the euro area, with a large set of about one hundred monthly indicators. Our empirical findings provide strong support for pooling over many specifications rather than selecting a specific model.
    Keywords: casting, forecast combination, forecast pooling, model selection, mixed - frequency data, factor models, MIDAS
    JEL: C53 E37
    Date: 2009
  14. By: Haeussler, Carolin; Harhoff, Dietmar; Mueller, Elisabeth
    Abstract: This paper investigates how patent applications and grants held by new ventures improve their ability to attract venture capital (VC) financing. We argue that investors are faced with considerable uncertainty and therefore rely on patents as signals when trying to assess the prospects of potential portfolio companies. For a sample of VC-seeking German and British biotechnology companies we have identified all patents filed at the European Patent Office (EPO). Applying hazard rate analysis, we find that in the presence of patent applications, VC financing occurs earlier. Our results also show that VCs pay attention to patent quality, financing those ventures faster which later turn out to have high-quality patents. Patent oppositions increase the likelihood of receiving VC, but ultimate grant decisions do not spur VC financing, presumably because they are anticipated. Our empirical results and interviews with VCs suggest that the process of patenting generates signals which help to overcome the liabilities of newness faced by new ventures.
    Keywords: biotechnology, intellectual property rights, patents, R&D and venture capital
    JEL: G24 L20 L26 O30 O34
    Date: 2009

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