Negative Central Bank Rates and Venture Capital Markets

We assess the impact of negative central bank interest rates on venture capital (VC) markets. Using data from 32 countries from 2004 to 2019, we find that interest rates have a significant effect on the functioning of VC markets. Higher interest rates are associated with higher demand for venture capital by entrepreneurs and higher fundraising activity of VC firms. However, although entrepreneurs’ demand is lower when interest rates become negative, the fund-raising activity of VC firms increases. We explain this counterintuitive finding by referring to the principal-agent relationship between general and limited partners of VC firms in combination with behavioral finance arguments. The effect of negative interest rates loses strength over time, which suggests that negative interest rates might eventually become the “new normal”.