The role of venture capital in merger and acquisition performance

ABSTRACT

We examine the effects of venture capital (VC) backing on the market responses to M&A events among a group of Chinese firms listed on ChiNext. We find a positive market response to M&A carried out by the companies backed by venture capital and this effect is robust after we address the endogeneity by employing Heckman two-stage approach. Our results support the notion that the involvement of VCs in their portfolio companies alleviates the information asymmetry problem.

KEYWORDS:

• Merger and acquisition performance
• venture capital
• information asymmetry
• China

JEL CLASSIFICATION:

• G14
• G24
• G34

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The existing research has confirmed the effects of VC on other corporate issues including board structure, earnings management, innovations and so on (Baker and Gompers 2003; Hochberg 2012; Que and Zhang 2020).

² They don’t find any essential effects. Their estimates of the coefficients on VC-backing dummy are negative and statistically insignificant. They find some positive effects for VC committing to longer lockup. However, the effects are not economically important as the greatest estimate is only 0.013 with a significance level of 10%. Moreover, they don’t address the endogeneity problem of VC-backing.

³ The same measure is widely used in previous studies, for example, Arikan and Capron (2010), Masulis and Nahata (2011), and Momtaz and Drobetz (2020).

⁴ For example, Moeller, Schlingemann, and Stulz (2004); Bao and Edmans (2011); Cornett, Tanyeri, and Tehranian (2011); Yang, Guariglia, and Guo (2017); Huang, Jiang, and Wu (2018); Momtaz and Drobetz (2020).

⁵ Arikan and Capron (2010) and Masulis and Nahata (2011) employ the same method to address the endogeneity of VC-backing. Instead of Heckman two-stage approach, one can also use IV approach to address the endogeneity problem. Heckman two-stage approach assumes that the endogeneity rises because of omitted variables and adds inverse Mills ratio in the regression as a control, while IV method replaces the endogenous variable with its exogenous part which is constructed after one regresses the endogenous variable on exogenous instrument variables. Nevertheless, our conclusion stays unchanged if we use IV method instead.

Additional information

Funding

This work was supported by the Shanghai Planning Office of Philosophy and Social Science [2020EJB010].