Does religiosity influence venture capital investment decisions?

Theories on contextual behavior (e.g., social norm, self-identity, and legitimacy theories) suggest that the religiosity of the geographical area in which an organization operates influences its behavior. Using a sample of 91,020 VC investments in the U.S., we study whether religiosity influences VC investment decisions. Based on prior literature that finds a positive relation between religiosity and risk aversion, we posit that VCs located in more religious counties make less risky investments. We find that VCs located in more religious areas are more likely to be involved in staging and syndication and have a greater propensity to invest in later and expansion stages of portfolio companies. Taken together, our results suggest that VCs located in religious counties tend to be more risk averse.     

Venturing beyond the IPO: Financing of Newly Public Firms by Venture Capitalists

Contrary to conventional wisdom, we document that approximately 15% of venture capitalist (VC)-backed firms raise additional capital from VCs in the five years after going public. We propose two explanations for why firms revert to VC financing post-IPO (initial public offering). First, we hypothesize that VC participation in post-IPO financing represents an efficient solution to informational problems that would otherwise constrain firms’ abilities to exploit value-increasing investments. Analyses of firm and VC characteristics, together with the finding that these investments are value-increasing for both VCs and the underlying companies, support this hypothesis. We find no support for the alternative that agency conflicts motivate these investments.     

Do more reputable financial institutions reduce earnings management by IPO issuers?

This study investigates whether financial intermediaries (FIs) participating in the IPO process play a significant role in restraining earnings management (EM). Specifically, we examine whether EM around IPOs is negatively related to investment banks (IBs) and venture capital (VC) investor reputations. In general, we do not find evidence that VCs as a group significantly restrain EM by IPO issuers. However, we uncover strong evidence that more reputable VCs and IBs are associated with significantly less EM, which is consistent with them implicitly certifying the quality of issuer financial reports. Moreover, a stronger reduction in EM is found when more reputable IBs are matched with more reputable VCs, which indicates that VC and IB reputation are complements rather than substitutes. These conclusions are invariant to adjustments for potential endogeneity of underwriter reputation and VC-backing or reputation.     

Economic freedom and cross-border venture capital performance

We investigate the determinants of cross-border venture capital (VC) performance using a large sample of 10,205 cross-border VC investments by 1906 foreign VC firms (VCs) in 6535 domestic portfolio companies. We focus on the impact of a domestic country's economic freedom on the performance of both VC investments and portfolio companies using a probit model and the Cox hazard model. After controlling for other related factors of domestic countries, portfolio companies, VCs and the global VC market, as well as year and industry fixed effects, we find that a domestic country's economic freedom is crucial to cross-border VC performance. In particular, in a more economically free country, as measured by the raw values of, quartiles of or the ranking in the index of economic freedom (IEF), a foreign VC-backed portfolio company is more likely to pull off a successful exit through an IPO (initial public offering) or an M&A (merger and acquisition), and a foreign VC firm is likely to spend a shorter investment duration in the portfolio company. We also identify interesting evidence on the impact of many other level factors of domestic countries, portfolio companies, VCs and the global VC market on cross-border VC performance.     

Whom You Know Matters: Venture Capital Networks and Investment Performance

Many financial markets are characterized by strong relationships and networks, rather than arm's‐length, spot market transactions. We examine the performance consequences of this organizational structure in the context of relationships established when VCs syndicate portfolio company investments. We find that better‐networked VC firms experience significantly better fund performance, as measured by the proportion of investments that are successfully exited through an IPO or a sale to another company. Similarly, the portfolio companies of better‐networked VCs are significantly more likely to survive to subsequent financing and eventual exit. We also provide initial evidence on the evolution of VC networks.     

Does cross-border syndication affect venture capital risk and return?

Venture capital (VC) cross-border syndication has increased significantly in recent years. This study examines the risk and returns of investments of US–European cross-border syndicates in US portfolio companies. We use a large sample of investments across four financing stages, and highlight several noteworthy differences between cross-border syndicates and previous US-only evidence. By comparison, US–European syndicates are larger than US-only syndicates, involve younger VCs, and focus more on later financing stages. Controlling for sample selection bias caused by the endogenous choices of exit route and exit timing, we examine the risk and returns of investments backed by cross-border syndicates. Consistent with evidence from US-only syndicates, alpha and beta decrease monotonically from the earliest (start-up) stage to the later stages of financing.     

Performance of Private to Public MBOs: The Role of Venture Capital

Abstract:   Using a unique dataset, we examine financial performance, and venture capital involvement in 167 MBOs exiting through IPOs (MBO‐IPOs) on the London Stock Exchange, during the period 1964 –1997. VC backed MBOs seem to be more underpriced than MBOs without venture capital backing, based on average value‐weighted returns. MBOs backed by highly reputable VCs tend to be older companies, and exit earlier than MBOs backed by less reputable VCs. The results contradict 'certification' and 'grandstanding' hypotheses supported by US data ( Megginson and Weiss, 1991 ; and Gompers, 1996 , respectively). We found no evidence of either significant underperformance, or that VC backed MBOs perform better than their non‐VC backed counterparts in the long run. However, MBOs backed by highly reputable venture capital firms seem to be better long‐term investments as compared to those backed by less prestigious venture capitalist firms. The results remain robust after using different methods to measure performance, and after controlling for sample selectivity bias.     

Venture Capitalists, Business Angels, and Performance of Entrepreneurial IPOs in the UK and France

Abstract:  Using a unique sample of 444 entrepreneurial IPOs in the UK and France, this paper analyses the investment patterns and the stock-market performance effects of two types of early stage investors: venture capitalists (VCs) and business angels (BAs). Extending existing research, we identify important endogeneity and institutional effects. Our findings indicate that UK IPOs have a higher retained ownership and lower participation ratio by BAs, but a lower retained ownership and participation ratio by VCs than in France. BA and VC investments are substitutes, and they are endogenously determined by a number of firm- and founder-related factors, such as founder ownership and external board 'interlocks', and underwriter reputation. UK VCs are effective third-party certifying agents who reduce underpricing in UK IPOs, whereas in French IPOs they increase it by appearing to engage in grandstanding. This certification effect is more significant in UK IPOs involving both high VC and BA ownership. Finally, underpricing increases with VC participation ratio, where the higher exit of VCs seems to increase the risk premium required by outside investors, in particular in the UK.     

The value of ongoing venture capital investment to newly listed firms

We examine whether the market values continuing venture capital (VC) investor involvement in firms post-IPO. Compared to the US, Australian VC investors exit their investments post-IPO by on-market sales rather than distribution of holdings to their investors. Lockup periods tend to be longer and ownership thresholds for reporting trades lower. We find that the market responds positively to buy transactions, negatively to sell transactions of VC investors and negatively to the resignation of VC directors. These results are consistent with VC investors in the firm having a positive influence and creating value from which the VCs and other shareholders benefit.     

Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses

We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs describe the strengths and risks of the investments as well as expected postinvestment actions. We classify the risks into three categories and relate them to the allocation of cash flow rights, contingencies, control rights, and liquidation rights between VCs and entrepreneurs. The risk results suggest that agency and hold‐up problems are important to contract design and monitoring, but that risk sharing is not. Greater VC control is associated with increased management intervention, while greater VC equity incentives are associated with increased value‐added support.     

VC investments and global exits

This paper examines exits of UK venture capital backers (VCs) from portfolio companies around the world. Mergers and acquisitions (M&A) are the most frequently used exit route for all investments, both in the UK and abroad. Exit through M&A is particularly common for investments in the UK while the probability of an exit through an initial public offering (IPO) is substantially lower for investments made in the UK than abroad. We are able to explain these country differences in terms of variations in the characteristics of VCs, portfolio companies, legal systems and market conditions. Portfolio companies backed by experienced VCs have high probabilities of exits through M&A or IPO. A successful exit is more likely when a VC syndicate includes an experienced member. The likelihood of a successful exit through M&A, IPO or management buyouts is high in countries with, and at times of, high stock market liquidity. Legal systems that provide more investor protection facilitate exits through IPO or M&A.     

How do legal differences and experience affect financial contracts?

We analyze venture capital (VC) investments in twenty-three non-US countries and compare them to US VC investments. We describe how the contracts allocate cash flow, board, liquidation, and other control rights. In univariate analyses, contracts differ across legal regimes. However, more experienced VCs implement US style contracts regardless of legal regime. In most specifications, legal regime becomes insignificant controlling for VC experience. VC firms that do not use US style contracts fail significantly more often, even controlling for VC experience. The results are consistent with US style contracts being efficient across a wide range of legal regimes.     

Does Reputation Limit Opportunistic Behavior in the VC Industry? Evidence from Litigation against VCs

We examine the role of reputation in limiting opportunistic behavior by venture capitalists towards four types of counterparties: entrepreneurs, investors, other VCs, and buyers of VC‐backed startups. Using a hand‐collected database of lawsuits, we document that more reputable VCs (i.e., VCs that are older, have more deals and funds under management, and syndicate with larger networks of VCs) are less likely to be litigated. We also find that litigated VCs suffer declines in future business relative to matched peers. These declines are larger for more reputable VCs, and for VCs that are defendants to multiple lawsuits or sued by entrepreneurs.     

Investor abilities and financial contracting: Evidence from venture capital

Using a large, new database of contractual provisions governing the allocation of cash flow rights in venture capital (VC) financings, we investigate how contract design is related to VC abilities to monitor and provide value-added services to the entrepreneur. We find that more experienced VCs, who have superior abilities and more frequently join the boards of their portfolio companies, obtain weaker downside-protecting contractual cash flow rights than less experienced VCs. Several pieces of evidence suggest that this relation is unlikely to be driven by selection effects. The results suggest that VCs with better governance abilities focus less on obtaining downside protections, which entail risk-sharing costs, and more on other aspects of the contract (such as obtaining board representation) during negotiations with entrepreneurs. The results also imply that previous estimates of the amount entrepreneurs pay for affiliation with high-quality VCs are overstated.     

Coaches or Speculators? The Role and Impact of Venture Capital on Executive Compensation in Chinese Listed Companies

In this paper, we utilize a panel dataset that covers 1245 listed companies which accomplished their IPO during 2006 to 2014 in China to investigate the impact of venture capital (VC) firms on executive compensation, equity incentive and pay-performance-sensitivity. We make several key findings: First, we find the presence of VCs can significantly raise the executive compensation. Second, high reputation VCs and private VCs increases the likelihood of granting executive equity incentives, whereas foreign VCs are significantly negatively related with executive equity incentive. Third, the pay-performance sensitivity of government VCs and foreign VCs is significant on stock return (RET) whereas insignificant on accounting performance (ROA). Moreover, the increasing VCs share in portfolio companies enhance the pay performance sensitivity on RET. Our results show that before VCs final exiting their post-IPO portfolio companies in China, VCs’ impact on executive compensation are more consistent with grandstanding theories and intending to provide higher cash compensation to encourage executives to raise the companies’ stock price, which is indicating VCs’ changing role from a coach into a speculator after the portfolio companies’ IPO.     

What Matters in Venture Capital? Evidence from Entrepreneurs’ Stated Preferences

We study how entrepreneurs evaluate the ability of different US venture capitalists (VCs) to add value to start-up companies. Analyzing a large data set of entrepreneurs’ stated preferences regarding VCs, we demonstrate that entrepreneurs view independent partnership VCs more favorably than other VC types (e.g., corporate, financial, and government sponsored VCs). Although entrepreneurs are able to correctly identify VCs with better track records, they do not believe them to be more desirable investors. We also find that an entrepreneur's rankings are affected by their overall exposure to VCs, emphasizing the role of experiential learning in the venture capital market.     

Venture-Capital Investment in Minority Business

This study analyzes the performance of mature investments made by venture-capital (VC) funds that specialize in financing minority business enterprises. We explore the hypothesis that VCs focusing on investing in minority businesses earn attractive returns because this market niche is underserved. Minority VC funds collectively earned yields on their realized investments that were estimated to be broadly equivalent to those of the mainstream VC industry. However, these yields vary greatly from fund to fund. VC fund traits that predict high yields on individual investments are identified by estimating multivariate regressions explaining net investment returns.     

Politician as venture capitalist: Politically-connected VCs and IPO activity in China

This study examines the impact of venture capitalists' (VC) political connections on their portfolio companies. Specifically, we use a manually-collected dataset of VCs' political connection to investigate the potential benefits and costs that politically-connected VCs bring to their portfolio companies. On the benefit side, we find that companies backed by politically-connected VCs are more likely to obtain IPO approval from the Chinese Securities Regulatory Commission (CSRC, China's counterpart to the SEC in the US). On the other hand, these VCs are more likely to acquire equity in the company at a significant discount and to invest shortly before the IPO application. In addition, we find that politically-connected VC-backed companies do not experience greater improvements in financial performance, corporate governance, or innovation output subsequent to receiving venture financing. Our results further show that companies backed by VCs with political connections are less mature and experience more underpricing at their IPO than non-politically-connected VC-backed companies. Finally, we find that, compared to non-politically-connected VCs, politically-connected VCs exit earlier after a company's IPO and that their portfolio companies experience greater post-IPO underperformance and performance volatility.     

Venture capitalists and portfolio companies’ real activities manipulation

I study the relation between venture capitalists’ (VCs) presence and real activities manipulation (RM). I find that compared to non-venture-backed companies, venture-backed companies show significantly less RM in the first post-IPO fiscal year. The results are robust after controlling for the VC selection endogeneity. This is consistent with the argument that VCs do not inflate earnings when they exit the IPO firm but instead exercise a monitoring role to reduce the RM by other insiders. By the end of the second post-IPO fiscal year when VCs exit the portfolio companies, their impact on portfolio companies’ RM decreases dramatically. This suggests that the impact of VCs on portfolio companies is mainly through direct monitoring rather than through the establishment of a governance structure. A partitioned sample analysis indicates that VCs lapse their control and do not restrain RM during the Internet Bubble. VCs also tighten their control and reduce significantly RM in technology companies where managers engage in more aggressive RM, but they have no influence on RM in non-tech companies. Furthermore, using alternative VCs’ reputation proxies, I find that portfolio companies’ RM is negatively associated with VCs’ reputation.     

Foreign VCs and venture success: Evidence from China

This paper analyzes the role of foreign VCs in driving venture success in emerging markets. We analyze a comprehensive data set of 4753 portfolio companies from China. We test whether the presence of a foreign VC increases the likelihood that a portfolio company is successfully exited. We find that the presence of a foreign VC does not per se significantly increase the likelihood of a successful exit. However, the likelihood of a successful exit increases if the foreign VC collaborates with a joint venture (JV) partner. Further, the impact of foreign VC backing depends on the nature of the VC, with foreign VCs tending to perform better when investing in late-stage companies and when they are diversified across industries. If a foreign VC successfully exits an investment, then, compared with a domestic-VC, it prefers to exit via a M&A or secondary-buyout than via an IPO, reflecting the significant lock-up periods associated with VC-backed IPOs in China, the difficulty of achieving a foreign listing, and the difficulty listing a start-up on Chinese markets.