Institutional investor attention and venture capital valuation: evidence from China

ABSTRACT

This paper analyzes how institutional investor attention affects firm valuations in the venture capital market. Relying on research reports of financial institutions in China, we propose a direct measure of abnormal institutional attention to industries (AIA) after eliminating industry differences and heteroscedasticity. We find that firm valuation is positively associated with institutional investor attention. Our conclusion continues to hold after controlling for selection bias and validating different measures of AIA. In addition, we find a negative relationship between AIA and the performance of VC investments measured by the likelihood of successful exits. Our findings support the notion that an increase in venture valuations is overpricing caused by institutional attention rather than a fundamental premium.

KEYWORDS:

• Institutional investor attention
• venture capital
• firm valuations
• overpricing

JEL CLASSIFICATION:

• G12
• G24

Disclosure statement

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

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ The CSMAR is a leading data vendor and can be obtained from Wharton Research Data Services (WRDS).

² We measure investor attention at the industry level instead of firm level for two reasons. First, VCs face thousands of choices when investing ventures, which make them prefer to allocating attention to sector-level factors such as industries (Peng and Xiong 2006). Second, VCs tend to specialize by industry and invest ventures in industries they have experience.

³ Experience is defined as the number of years from the lead VC’s establishment to its investment. The lead VC is the VC that invests the maximum amount in the financing round.

Additional information

Funding

This work was supported by the The Research Foundation for Youth Scholars of Beijing Technology and Business University [QNJJ2021-51].