Macroeconomic factors and venture capital market liquidity : evidence from Europe*

The relationship between macroeconomic factors and stock market liquidity is known but not the same can be said of macroeconomic factors and VC market liquidity. This study investigates whether there is a cointegration between macroeconomic factors and VC market liquidity and examines how macroeconomic factors affect VC market liquidity. We perform a panel fully modified OLS regression analysis after carrying out panel cointegration on a country-level dataset of 22 EU/EEA countries from 2000 to 2020. There is a long-run covariance between VC market liquidity and macroeconomic variables. Specifically, a 1% expansion in the size of the economy would lead to 0.652%, 0.927%, 0.661%, 0.723%, and 0.755% increase in VC market liquidity measured by exits through trade sales, IPOs, sales to PE firms, financial institution and MBOs, respectively. The European VC market is progressively increasing in liquidity as can be seen in the UK, France, and Germany. We report that as the size of the economy and money supply increases, VC market liquidity increases. Interest rate is significantly inversely related to VC market liquidity. The result is mostly significant for some exit strategies such as trade sales and IPOs. However, on the whole, inflation and unemployment do not significantly relate to VC market liquidity. This article has practical implications for venture capitalists and investors. It informs investors on which exit route has a significant relation with macroeconomic variables in Europe. The study effectively shows the aggregate impact of the macroeconomic conditions which is usually not the case with firm-level data. In well-developed financial markets, the venture capital (VC) market complements the stock market in providing equity finance. However, the VC market remains underdeveloped even in Europe. This paper attempts to address this market failure by exploring the liquidity of the VC market and its relationship with macroeconomic variables to provide some assurances to market participants. To provide reasonable assurance of minimal losses during the exit stage of VC activities, the VC market in Europe may exit through IPOs, trade sales, Mezzanine financing, MBOs, and sales to private equity firms and financial institutions. We confirm a cointegration between macroeconomic factors and VC market liquidity. The study finds that as the size of the economy and money supply increases, VC market liquidity increases. Interest rate is significantly inversely related to VC market liquidity. Investors and potential investors need not worry about inflation and unemployment because they do not significantly affect VC market liquidity. The paper informs market participants that trade sales and IPOs are the most popular VC exit routes and for that matter, very liquid in Europe.