The Role of Venture Capital Backing in the Underpricing and Long-Run Performance of Chinese IPOs

Sammanfattning: We investigate the role of venture capital (VC) backing in the underpricing and long-run performance of initial public offerings (IPOs) in China from 2004 to 2012. China provides a unique contextual setting for conducting such an examination with a regulatory framework in the going public process vastly different from its western peers. The government decides on which companies that are allowed to go public, has the last word in the pricing of IPO shares, and controls the timing of IPOs. Reforms introduced in 2009 has improved the pricing of IPO shares and enhanced venture capitalists ability to exit their investments through IPOs in mainland China. We find that VC backed IPOs experience significantly lower first-day returns than comparable non-VC backed IPOs in the period from 2010 to 2012, with an average return difference of 6.67%. Our results are robust when accounting for differences in offering and firm characteristics, and thus, we provide support for the venture capitalist certification hypothesis proposed by Megginson and Weiss (1991), in which, venture capitalists reduce the information asymmetry between investors and issuing firms by certifying the offering price, and thus, reduce first-day returns. We further show that VC backed IPOs significantly outperform non-VC backed IPOs in the 36-month period following the IPO, and hence, our results provide evidence of venture capitalists adding value to their portfolio companies post-IPO as well. Our findings suggest that the importance of venture capitalists increases as the IPO market becomes more market-oriented and conforms towards the standards found in developed countries. We complement previous studies conducted in developed markets by providing evidence that venture capitalists involvement also matter in emerging markets with more stringent regulatory restrictions.