The Effect of Venture Capital on Invested Firms’ Social Responsibility: Evidence from Venture Capital’s Exits

ABSTRACT

The impact of venture capital firms (VCs) on invested firms’ shareholder benefits is extensively examined in the literature, but few studies consider VCs’ impact on invested firms’ other stakeholder benefits. In this paper, we use the exit of VCs from a 2010 to 2017 sample of Chinese listed firms as a shock in a difference-in-differences analysis to investigate VCs’ influence on invested firms’ corporate social responsibility (CSR). We find that CSR decreases significantly after VCs’ exits, particularly if VCs are not state-owned or are short-term investors in firms. A further analysis shows that VCs’ exits affect firms’ shareholder, creditor, employee, and environmental benefits. VCs improve CSR by alleviating their agency costs and reducing their financial constraints, both of which increase significantly after VCs’ exit from firms. The effect of VCs on CSR also appears to improve corporate performance, implying that this positive effect is consistent with shareholder benefits.

KEYWORDS:

• Venture capital
• corporate social responsibility
• investment horizons

JEL CLASSIFICATIONS:

• G24
• M14

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 average sales growth rates of the firms listed on the main board, SMB and GEM from 2010 to 2017 are 0.1976, 0.2108 and 0.2786, and the median rates are 0.0989, 0.1463 and 0.2079, respectively.

2. The SMB has the same listing criteria as the main board, but it mainly absorbs companies with relatively little circulating stock. Firms applying for the GEM need to satisfy a lower profit threshold and simpler issuance conditions than they do for the main board.

3. In contrast, the Chinese firms listed on the main board are mainly mature and have very little VC involvement. We can infer this fact from the difference between our sample and the sample of Li et al. (2021). The sample of Li et al. (2021) includes the IPO companies in the main board, the SMB and the GEM from 2011 to 2017. They have 415 firms with VC backing. In our sample, the number of IPO companies backed by VCs in the SME and GEM boards from 2011 to 2017 is 471.

4. Specially treated firms are those with abnormal financial or other conditions.

5. Hexun.com provides an index for CSR performance rather than CSR reporting quality. Appendix I provides the detailed CSR evaluating system of Hexun.com.

6. There are 10 treatment samples in the sixth and seventh years before the VC’s exit, which we classify into TreatPre5. There are 13 samples in the sixth year after the VC’s exit, which we classify into TreatPost5.

7. We do not directly use the VC firm amount of each province in each year for two reasons. First, the VC firm amount in some provinces in some years is missing. Second, the number of VC firms in each province can grow rapidly. If we use the raw data, the province with the largest number of VC firms in 2011 ranks very low in the entire data set. Thus, the raw data of VC firm number in a certain year cannot reflect the prosperity of VCs in a province. Using the average ranking of each province solves these problems; we obtain similar results if we use the average ranking of the venture capital investment size in each province as the instrument variable.

8. According to Preacher and Hayes (2008) and Hayes (2022), it is more appropriate to interpret KZ as a major or partial mediator rather than as a full one. In addition, by constructing the chain mediation model, we find that Turnover, Expense and Occupy have not only direct effects on CSR but also indirect effects on CSR through KZ.

Additional information

Funding

We acknowledge funding from Project Nos. 71702199 and 71872192 supported by the National Natural Science Foundation of China and Project No. GD19YYJ13 supported by the Philosophy and Social Science Planning Project of Guangdong Province in China.