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On the Usefulness of Tax Incentives for Business Angels and SME Owners: An Empirical Analysis

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  • Cécile Carpentier
  • Jean-Marc Suret

Abstract

Several governments have designed tax incentive programs to promote small business finance, yet evidence of their efficiency is very scarce. This article analyzes the QBIC program, introduced in Quebec to help capitalize SME. Individual investors in holding companies that finance one or more small corporations receive substantial tax credits. First, the functioning of the program is analyzed in light of the fundamentals of the small business finance paradigm, in particular the adverse selection, agency cost and control aversion problems. Because the program design does not consider these dimensions, it putatively cannot fulfill its primary objective of attracting angels. Rather, it should mainly serve mediocre quality firms, whose subsequent performance should be weak. We analyze the ownership of all the QBICs accredited between 1998 and 2003, and the operating performance of the 83 financed companies for which accounting data were available. Our tests confirm each of our hypotheses. The program can hardly be considered as a success. In terms of public policy, the study concludes that poorly designed programs cannot attain the objective of promoting small business capitalization. De nombreux gouvernements ont instauré des programmes fiscaux destinés à promouvoir le financement des petites et moyennes entreprises. Il existe toutefois très peu d'études de l'efficacité de ces initiatives. Nous analysons le programme de Société de placements dans l'entreprise québécoise (SPEQ), instauré au Québec pour améliorer la capitalisation des petites et moyennes entreprises. Les actionnaires de sociétés de portefeuille obtiennent d'importants crédits d'impôt lorsque ces sociétés financent des entreprises admissibles. Nous analysons en premier lieu le programme à la lumière des principes de base du financement des entreprises : l'asymétrie informationnelle, les problèmes d'anti-sélection et d'agence et la réticence à partager le contrôle. Comme le programme ne tient aucun compte de ces diverses dimensions, nous posons l'hypothèse qu'il ne permettra pas l'atteinte de l'objectif premier, qui était d'attirer des investisseurs providentiels dans l'actionnariat des entreprises. Nous supposons également que le programme devrait attirer principalement des entreprises de qualité médiocre, dont la performance après le placement sera faible. L'analyse de l'ensemble des SPEQ agréées entre 1998 et 2003 et des 83 sociétés financées pour lesquelles des données comptables sont accessibles permet de confirmer chacune de ces hypothèses. Le programme n'atteint pas ses objectifs et ne peut pas être considéré comme un succès. L'étude met en évidence l'importance de dessiner très soigneusement les programmes d'aide au financement des petites entreprises.

Suggested Citation

  • Cécile Carpentier & Jean-Marc Suret, 2005. "On the Usefulness of Tax Incentives for Business Angels and SME Owners: An Empirical Analysis," CIRANO Working Papers 2005s-13, CIRANO.
    • Handle: RePEc:cir:cirwor:2005s-13
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    References listed on IDEAS

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    1. Solodoha, Eliran & Rosenzweig, Stav & Harel, Shai, 2023. "Incentivizing angels to invest in start-ups: Evidence from a natural experiment," Research Policy, Elsevier, vol. 52(1).

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