On the usefulness of tax incentives for informal investors

Abstract

This article analyses the QBIC programme introduced in Quebec to help capitalize SMEs. Taxpayers that invest in holding companies that finance one or more growth corporations receive substantial tax credits. Companies financed by this programme are apparently of mediocre quality. After the financing, the firms' growth is weak and their operational performance is significantly inferior to that of companies of comparable size and sector. The programme apparently does not fulfil its primary objective, to attract angels. On average, capitalization of companies via the programme has diminished. This result is foreseeable because the programme design does not take into account phenomena inherent in the financing of closed companies, namely agency costs, asymmetry and adverse selection.

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