Review of Quantitative Finance and Accounting

, Volume 38, Issue 3, pp 391–410 | Cite as

Short and long-term interactions between venture capital returns and the macroeconomy: evidence for the United States

  • Roland Füss
  • Denis Schweizer
Original Research


The main purpose of this paper is to empirically model the influence of macroeconomic and financial variables on the performance of risk capital in the US. We start our investigation using a static long-run equilibrium model. In contrast to previous studies, we analyze the effect of several factors simultaneously within the framework of a vector error correction model (VECM). This allows us to study short- and long-term interactions to overcome the problem of endogeneity, and to discover causal mechanisms. The results show that the value of venture capital investments is positively related to industrial production, the exit channel Nasdaq, and the long-term interest rate. However, the value of venture capital investments is negatively related to the short-term interest rate. According to the short-term dynamics, VEC Granger causality confirms that only industrial production influences venture capital performance, while venture capital returns Granger causes Nasdaq performance.


Venture capital returns Macroeconomy Cointegration test VECM Granger causality Variance decomposition 

JEL Classification

C32 F4 G24 



We would like to thank the editor Cheng-Few Lee and the two anonymous reviewers for their helpful comments and suggestions. We are grateful to Daniel Schmidt, from CEPRES, for providing access to their databases. Furthermore, we would like to thank Samuel Bulmash, Christian Koziol, Lutz Johanning, Jan-Christoph Rülke, Joachim Zietz, and the participants of the Eastern Finance Association 45th Annual Meeting, Campus for Finance 2009 Conference, and the Swiss Society for Financial Markets (SGF) 12th Annual Meeting. All remaining errors are of course our own.


  1. Adkins LC, Krehbiel T, Hill RC (2000) Using cointegration restrictions to improve inference in vector autoregressive systems. Rev Quant Financ Acc 14(2):193–208CrossRefGoogle Scholar
  2. Allen F, Gale D (2004) Comparative financial systems: a discussion. In: Bhattacharya S, Boot AWA, Thakor AV (eds) Credit, intermediation, and the macroeconomy: models and perspectives. Oxford University Press, OxfordGoogle Scholar
  3. Audretsch DB, Acs ZJ (1994) New-firm startups, technology, and macroeconomic fluctuations. Small Bus Econ 6(6):439–449CrossRefGoogle Scholar
  4. Belke AH, Fehn R, Foster N (2006) Does venture capital investment spur employment growth? Finance India 20(1):75–98Google Scholar
  5. Black BS, Gilson RJ (1998) Venture capital and the structure of capital markets: banks versus stock markets. J Financ Econ 47(3):243–277CrossRefGoogle Scholar
  6. Bonini S, Senem AA (2009) The macro and political determinants of venture capital investments around the world. Available at SSRN:
  7. Brav A, Jiang W, Partnoy F, Thomas R (2008) Hedge fund activism, corporate governance, and firm performance. J Finance 63(4):1729–1775CrossRefGoogle Scholar
  8. Chiu IM (2008) An empirical study on the long-run determinants of exchange rate. Rev Pac Basin Financ Mark Policies 11(3):389–409CrossRefGoogle Scholar
  9. Cochrane JH (2005) The risk and return of venture capital. J Financ Econ 75(1):3–52CrossRefGoogle Scholar
  10. Cumming D, Walz U (2010) Private equity returns and disclosure around the world. J Int Bus Stud 41(4):727–754CrossRefGoogle Scholar
  11. Cumming D, Schmidt D, Walz U (2010) Legality and venture governance around the world. J Bus Ventur 25(1):54–72CrossRefGoogle Scholar
  12. DeFina RH (1991) Does inflation depress the stock market? Business Review (Federal Reserve Bank of Philadelphia) Nov. 3–12Google Scholar
  13. Dickey DA, Fuller WA (1979) Distribution of the estimators for autoregressive time series with a unit root. J Am Stat Assoc 74(366):427–431CrossRefGoogle Scholar
  14. Dickey DA, Said SE (1984) Testing for unit roots in autoregressive-moving average models of unknown order. Biometrika 71(3):559–607Google Scholar
  15. Dickey DA, Jansen DW, Thornton DL (1991) A primer on cointegration with an application to money and income. Federal Reserve Bank of St. Louis Review March/April, pp 58–78Google Scholar
  16. Engle RF, Granger CWJ (1987) Co-integration and error correction: representation, estimation, and testing. Econometrica 55(2):251–276CrossRefGoogle Scholar
  17. Fama EF (1981) Stock returns, real activity, inflation, and money. Am Econ Rev 71(4):545–565Google Scholar
  18. Froot KA, Scharfstein DS, Stein JC (1992) Herd on the street: informational inefficiencies in a market with short-term speculation. J Finance 47(4):1461–1484CrossRefGoogle Scholar
  19. Geske R, Roll R (1983) The fiscal and monetary linkage between stock returns and inflation. J Finance 38(1):1–33CrossRefGoogle Scholar
  20. Gompers PA, Lerner J (1998) What drives venture capital fundraising? Brookings Papers on Economic Activity-Microeconomics (July), pp 149–192Google Scholar
  21. Gompers PA, Lerner J (2001) The venture capital revolution. J Econ Perspect 15(2):145–168CrossRefGoogle Scholar
  22. Gompers PA, Kovner A, Lerner J, Scharfstein D (2008) Venture capital investment cycles: the impact of public markets. J Financ Econ 87(1):1–23CrossRefGoogle Scholar
  23. Granger CWJ (1969) Investigating causal relations by econometric models and cross-spectral methods. Econometrica 37(3):424–438CrossRefGoogle Scholar
  24. Granger CWJ (1983) Forecasting white noise. In: Zellner A (ed) Applied time series analysis of economic data. US Government Printing Office, USAGoogle Scholar
  25. Gultekin MN, Gultekin NB (1983) Stock market seasonality: international evidence. J Financ Econ 12(4):469–481CrossRefGoogle Scholar
  26. Hansen BE (1997) Approximate asymptotic P values for structural-change tests. J Bus Econ Stat 15(1):60–67CrossRefGoogle Scholar
  27. Inderst R, Müller HM (2004) The effect of capital market characteristics on the value of start-up firms. J Financ Econ 72(2):319–356CrossRefGoogle Scholar
  28. Jeng LA, Wells PC (2000) The determinants of venture capital funding: evidence across countries. J Corporate Finance 6(3):241–289CrossRefGoogle Scholar
  29. Johansen S (1988) Statistical analysis of cointegration vector. J Econ Dyn Control 12(2–3):231–254CrossRefGoogle Scholar
  30. Johansen S (1992) Determination of cointegration rank in the presence of a linear trend. Oxf Bull Econ Stat 54(3):383–397CrossRefGoogle Scholar
  31. Johansen S, Juselius K (1990) Maximum likelihood estimation and inference on cointegration - with applications to the demand for money. Oxf Bull Econ Stat 52(2):169–210CrossRefGoogle Scholar
  32. Kaplan SN, Schoar A (2005) Private equity performance: returns, persistence, and capital flows. J Finance 60(4):1791–1823CrossRefGoogle Scholar
  33. Klein A, Zur E (2009) Entrepreneurial shareholder activism: hedge funds and other private investors. J Finance 64(1):187–229CrossRefGoogle Scholar
  34. Kortum S, Lerner J (2000) Assessing the contribution of venture capital to innovation. RAND J Econ 31(4):674–692CrossRefGoogle Scholar
  35. Ljungqvist A, Richardson M (2003) The cash flow, return and risk characteristics of private equity. NBER Working Papers, p 9454Google Scholar
  36. Lu CL, So RW (2001) The relationship between REITs returns and inflation: a vector error correction approach. Rev Quant Financ Acc 16(2):103–115CrossRefGoogle Scholar
  37. Lütkepohl H (1991) Introduction to multiple time series analysis. Springer, BerlinGoogle Scholar
  38. Maddala GS, Kim IM (1998) Unit roots, cointegration, and structural change. Cambridge University Press, CambridgeGoogle Scholar
  39. Masih MM, Winduss T (2006) Who leads the Australian interest rates in the short and long run? An application of long run structural modelling. Rev Pac Basin Financ Mark Policies 9(1):1–24CrossRefGoogle Scholar
  40. Mayer C, Carlin W (2000) How do financial systems affect economic performance. In: Vives X (ed) Corporate governance: theoretical and empirical perspectives. Cambridge University Press, CambridgeGoogle Scholar
  41. Mukherjee TK, Naka A (1995) Dynamic relations between macroeconomic variables and the Japanese stock market: an application of a vector error correction model. J Financ Res 18(2):223–237Google Scholar
  42. Osterwald-Lenum M (1992) A note with quantiles of the asymptotic distribution of the maximum likelihood cointegration rank test statistics. Oxf Bull Econ Stat 54(3):461–472CrossRefGoogle Scholar
  43. Phillips PCB (1987) Time series regression with a unit root. Econometrica 55(2):277–301CrossRefGoogle Scholar
  44. Phillips PCB, Perron P (1988) Testing for a unit root in time series regression. Biometrika 75(2):335–346CrossRefGoogle Scholar
  45. Poterba JM (1987) How burdensome are capital gains taxes? J Public Econ 33(2):157–172CrossRefGoogle Scholar
  46. Poterba JM (1989) Venture capital and capital gains taxation. Tax Policy Econ 3:47–67Google Scholar
  47. Rajan RG, Zingales L (2003) The great reversals: the politics of financial development in the twentieth century. J Financ Econ 69(1):5–50CrossRefGoogle Scholar
  48. Romain A, Pottelsberghe BV (2004) The determinants of venture capital: a panel data analysis of 16 OECD countries. Working Paper CEB 04-005.RSGoogle Scholar
  49. Schertler A (2002) Path dependencies in venture capital markets. Kiel Working Paper No. 1120Google Scholar
  50. Schertler A (2003) Driving forces of venture capital investments in Europe: a dynamic panel data analysis. Kiel Working Paper No. 1172Google Scholar
  51. Schmidt DM (2004) Private equity-, stock- and mixed asset-portfolios: a bootstrap approach to determine performance characteristics, diversification benefits and optimal portfolio allocations. Center for Financial Studies, No. 2004/12Google Scholar
  52. Schmidt DM, Steffen S, Szabo F (2008) Exit strategies of buyout investments—an empirical snalysis. EFA 2008 Athens Meetings PaperGoogle Scholar
  53. Scholes MS (1972) The market for securities: substitution versus price pressure and the effects of information on share prices. J Bus 45(2):179–211CrossRefGoogle Scholar
  54. Schwert GW (1981) The adjustment of stock prices to information about inflation. J Finance 36(1):15–29CrossRefGoogle Scholar
  55. Solnik B (1983) International arbitrage pricing theory. J Finance 38(2):449–457CrossRefGoogle Scholar
  56. Wasmer E, Weil P (2004) The macroeconomics of labor and credit market imperfections. Am Econ Rev 96(4):944–963CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.EBS Business SchoolEBS Universität für Wirtschaft und RechtWiesbadenGermany
  2. 2.WHU-Otto Beisheim School of ManagementVallendarGermany

Personalised recommendations