I use a panel of US manufacturing industries to test how venture capital (VC) affects the size distribution of business firms. The estimates suggest that an increase in the supply of VC affects positively mean firm size by increasing the relative share of medium-sized and larger firms. These results are robust to specifications that address the endogeneity in the supply of VC. The empirical evidence is consistent with the idea that VC promotes the “elitization” of firm entry.

We exploit a provision in Spanish labor laws whereby employment protection is more stringent for firms with 50+ employees. Firm-level evidence suggests that during the credit crunch of 2008-09, healthy firms with less than 50 employees borrowing from troubled banks grew faster in sectors where production factors were sufficiently substitutable. This effect is made possible by firms’ substituting labor for capital when the rental cost of capital increases. Our analysis sheds new light on the importance of labor regulation and the technological substitutability of the factors of production in enabling firms to adjust to financial shocks.