Academic journal article Asian Development Review

Venture Capital Investment and the Post-IPO Performance of Entrepreneurial Firms: Evidence from the People's Republic of China

Academic journal article Asian Development Review

Venture Capital Investment and the Post-IPO Performance of Entrepreneurial Firms: Evidence from the People's Republic of China

Article excerpt

I. Introduction

Venture capital (VC) investment has attracted increasing interest from researchers and policymakers since the 1980s. It is widely believed that VC investment is a good way to fill up the funding gaps faced by young R&D-oriented ventures, and consequently, stimulate national innovation and economic growth (Bygrave 1987, Gompers and Lerner 1999). Since the 1980s, many nations in Europe and Asia have begun to initiate public programs to stimulate VC activities.1 Most countries try to duplicate the "American model" and build up a friendly environment for the VC sector by stimulating both demand and supply sides of the investment (i.e., by providing subsidies and preferential tax policies to both start-up companies and VC institutions, undertaking regulatory changes in pension funds and insurance funds management, and building up secondary stock markets).2 Currently, there are over 40 national VC associations around the world.

The People's Republic of China (PRC) numbers among the many countries that have made an effort to develop a vibrant VC industry to stimulate innovation. Starting from the mid-1980s, the government has initiated various programs to promote VC investment including injecting venture funds into government-controlled VC firms (VCFs), encouraging corporate VC arms, and attracting foreign venture funds. Indeed, the country's VC industry has developed dramatically over the past 2 decades.

The PRC has been the second largest VC market in the world since 2001. It has grown from a mere concept in the 1980s to an industry with over 400 domestic and foreign VCFs in 2011, managing over $48.53 billion investible capital. Meanwhile, the annual disbursement of VC investment has increased from $518 million in 2001 to $ 13 billion in 2011.3 Moreover, the PRC is now one of the most favored inve stment destinations of VC funds around the world.4 More importantly, the impact of the country's VC investment is seen in the global market. From 2000 to 2011, over 600 VC-backed Chinese firms went public. Such firms have become the major driving force in the development of financial and VC markets, supporting the sustainable growth of the PRC and the rest of the world.

Despite the VC industry's rapid growth and growing impact on the global capital market, systematic analysis of the VC market in the PRC remains very limited. Guo and Jiang (2013) examine the role of VC investment in VC-backed firms based on firm-level panel data. However, they mainly focus on the effects of VC investment on the early development stages (i.e., prior to an initial public offering or IPO). Theoretical (Black and Gilson 1998) and empirical (Jeng and Wells 2000) studies suggest that a well-developed capital market is one of the most important factors behind VC investment. However, Chinese stock markets are far less developed, and their regulation has long been criticized (Allen, Qian, and Qian 2005; Wang 2005; Fan, Wong, and Zhang 2007; Kao, Wu, and Yang 2009; Allen et al. 2012; Piotroski and Zhang 2014). A natural question thus arises as to whether and how VC investments play a role in firms listed on such stock markets.

The present study tries to fill the existing gap by exploring the effects of VC investment on the post-IPO performance and growth of VC-backed firms in the PRC. Based on a panel dataset that covers all listed firms in the country's stock markets between 1990 and 2010, our study focuses on the following important questions. First, we ask whether VC affects long-term post-IPO firm performance and growth. Second, we examine whether the experience or specialization of VCFs influences the effects of VC investment on post-IPO performance and growth of firms. Finally, we look at the relationship between VC investment and corporate governance of portfolio companies to further explore the mechanisms by which VC investment affects the long-term performance and growth of VC-backed firms.

We find that VC-backed firms in the PRC demonstrate significantly higher performance and growth than non-VC-backed firms after an IPO. …

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