The Effect of Venture Capital Investment—Evidence from China's Small and Medium‐Sized Enterprises Board

Abstract

In this paper, we use a matched sample to empirically test the effect of venture capital investment on the companies listed on the mall and edium‐ized nterprises oard in hina. We find that hinese venture capitalists neither add value to their invested firms in the initial public offering (IPO) process nor improve operating performance. Rather, compared with their non‐venture‐backed counterparts, venture‐backed firms are associated with a greater level of IPO underpricing and inferior operating performance both before and after IPO. Our findings in hina support neither the certification/monitoring hypothesis nor the grandstanding hypothesis, but partly support the adverse selection hypothesis.

The authors wish to thank Dr. Howard Van Auken and the two anonymous reviewers for their insightful comments and extensive inputs to this article. The authors also wish to thank Tan Rong, Xu Jin, and Cao Ye for their assistance in data collection. This research is supported by NSFC Project (71173146‐70903046) and the Departmental Research Grant of the School of Accounting and Finance, Hong Kong Polytechnic University.

The authors wish to thank Dr. Howard Van Auken and the two anonymous reviewers for their insightful comments and extensive inputs to this article. The authors also wish to thank Tan Rong, Xu Jin, and Cao Ye for their assistance in data collection. This research is supported by NSFC Project (71173146‐70903046) and the Departmental Research Grant of the School of Accounting and Finance, Hong Kong Polytechnic University.

Notes

The authors wish to thank Dr. Howard Van Auken and the two anonymous reviewers for their insightful comments and extensive inputs to this article. The authors also wish to thank Tan Rong, Xu Jin, and Cao Ye for their assistance in data collection. This research is supported by NSFC Project (71173146‐70903046) and the Departmental Research Grant of the School of Accounting and Finance, Hong Kong Polytechnic University.

1 It must be noted that the SME Board is not a NASDAQ‐type market. Rather, it is a component of the main board in that issuers must comply with the same set of laws, regulations, listing requirements, and procedures as the main board issuers.

2 Pre‐IPO investment is another subset of private equity and exhibits features distinct from those of typical VC investment. It targets mature private firms that have already started their IPO preparation or anticipated public offering.

3 In this study, we focus on the issuers on SME Board during the period May 27, 2004 to December 31, 2008. We exclude the issuers on the main boards of the SHSE and SZSE they tend to be large‐scale, state‐owned enterprises, and our examination shows that only about 1 percent of main board issuers have VC backing. We also exclude issuers on the GE Board because (1) the substantially lowered listing criteria compared with the SME board may cause sample selection bias and data comparability issues; and (2) given the short history of GE Board (less than two years), their issuers’ post‐IPO performance data are limited. Finally, we exclude the issuers on SME board after December 31, 2008 because since 2009 the GE Board becomes the primary choice of listing venue for Chinese private issuers and the SME board has gradually lost momentum.

4 The SME Board Index is not used as it was not available until June 2005. The correlation coefficient of the Shenzhen Composite A‐Share Index and SME Board Index between June 2005 and December 2007 is 0.98, significant at.01.

5 For instance, mean state ownership in the sample of Chen, Firth, and Kim (2004) is 31.26 percent.

6 According to the AVCJ data, in the period from 2000 to 2008, the average annual amount of start‐up/early‐stage investment represents 16.9 percent of the total VC investment amount.

Additional information

Notes on contributors

Yi Tan

Yi Tan is Associate Professor of Finance at the School of Economics, Shanghai Jiao Tong University.

Hong Huang

Hong Huang is Lecturer of Law at the School of Accounting and Finance, The Hong Kong Polytechnic University.

Haitian Lu

Haitian Lu is Associate Professor of Law at the School of Accounting and Finance, The Hong Kong Polytechnic University.