Do foreign and domestic venture capital firms differ in replacing CEOs of portfolio companies?

ABSTRACT

Using a sample of 5,383 investment events of venture capital firms (VCs) investing in Chinese companies between 1997 and 2017, we investigate how levels of human capital of chief executive officers (CEOs) of portfolio companies affect tendencies of foreign and domestic VCs to replace CEOs. We find that domestic and foreign VCs are similar in that they are both less likely to replace CEOs of their portfolio companies if CEOs have higher levels of human capital. Furthermore, we find that domestic and foreign VCs exhibit significant differences in CEO replacement when not considering CEO human capital or when CEOs have lower levels of human capital. Results are consistent with our hypotheses that foreign VCs rely on CEO human capital as a stronger quality signal than domestic VCs, because they have more difficulty monitoring CEOs’ post-investment performance. On the contrary, the geographical and cultural proximity of domestic VCs enables them to obtain information other than CEO human capital, such as CEOs’ social skills, potential, entrepreneurial passion, and charisma, to make replacement decisions. The study advances our understanding of the behavioral differences between domestic and foreign VCs in the post-investment management process.

KEYWORDS:

• Foreign VCs
• domestic VCs
• CEO replacement
• CEO human capital
• portfolio company

Disclosure statement

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

Notes

1. PitchBook News & Analysis, Mar 18, 2022. Available at https://pitchbook.com/.

2. Higher education in China is divided into four levels: specialist, bachelor’s, master’s, and doctoral levels. Bachelor’s, master’s, and doctoral degrees could be obtained upon graduation. Specialized education generally enrolls students who have graduated from high school or have equivalent education, and specialized students can obtain a specialized certificate after graduation.

3. Data on the geographic distance between VCs and portfolio companies and between VC pairs were obtained from https://www.timeanddate.com/, a global time and time zone management website.

4. Data on average years of schooling are from the National Bureau of Statistics of China and are available at http://www.stats.gov.cn/tjsj/ndsj/.

5. The Dalhousie University Atmospheric Composition Analysis Group provides PM2.5 data sources for North America, China, Europe, and other regions. The data is available at https://sites.wustl.edu/acag/datasets/surface-pm2–5/.

6. Data on VCs’ affiliation is obtained from Chen et al. (2021).

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71962033].