The Impact of Venture Capital Monitoring

We show that venture capitalists' (VCs) on‐site involvement with their portfolio companies leads to an increase in both innovation and the likelihood of a successful exit. We rule out selection effects by exploiting an exogenous source of variation in VC involvement: the introduction of new airline routes that reduce VCs' travel times to their existing portfolio companies. We confirm the importance of this channel by conducting a large‐scale survey of VCs, of whom almost 90% indicate that direct flights increase their interaction with their portfolio companies and management, and help them better understand companies' activities.     

Cross-border venture capital performance: Evidence from China

This paper investigates the determinants of cross-border venture capital (VC) performance in the Chinese VC market. We focus on the impact of foreign VC firms' (VCs') human capital and domestic entrepreneurs' experience on the performance of both VC investments and portfolio companies using logit and Cox hazard models. After controlling for portfolio company quality, domestic VC industry development, domestic exit conditions and a number of other factors, little correlation was evident between VC performance and foreign VCs' human capital, such as experience, networks and reputation. In contrast, the domestic entrepreneurs' experience is crucial to VC performance. In particular, if an entrepreneur has more general experience in terms of the number of companies previously worked for or more special experience in terms of the number of companies previously served as a CEO or top manager, a portfolio company is more likely to pull off a successful exit through IPO or M&A, and the VCs are also likely to shorten their investment duration in the portfolio company.     

Are related-party transactions beneficial or detrimental in emerging markets? New evidence of financial services agreements from China

This paper examines a new and underexplored form of related-party transactions in which Chinese listed companies sign financial services agreements with affiliated finance companies within the same business group. With FSAs, listed companies can readily finance through internal capital markets. However, some concerns controlling shareholders can use FSAs to embezzle funds of listed companies legitimately, thereby expropriating the wealth of minority shareholders. Using a staggered difference-in-differences model with fixed effects, we empirically examine the economic consequences of FSAs. We document that FSAs are detrimental to listed companies' market valuation and operating performance. This phenomenon mainly concentrates on companies without financial constraints and those with lower bankruptcy risks. Further analysis shows that sound corporate governance could inhibit the signing of FSAs ex-ante. This paper contributes to the literature on the economic consequences of related-party transactions in emerging markets. It also provides empirical support that the internal capital market of business groups in China is inefficient and offers controlling shareholders opportunities for tunneling.     

Connected VCs and strategic alliances: Evidence from biotech companies

We study a new channel through which portfolio companies benefit from ties among venture capitalists (VCs). By tracing individual VCs' investment and syndication histories, we show that VCs' ties improve companies' access to strategic alliance partners. While existing studies demonstrate that alliances are more frequent among companies sharing the same VC, we provide evidence that alliances are also more frequent among companies indirectly connected through VC syndication networks. In addition, our results suggest that VCs' ties mitigate asymmetric information problems that arise when alliances are formed. Finally, strategic alliances between companies from connected VCs' portfolios tend to perform well. We demonstrate that this type of alliance is associated with higher IPO chances. We also address alternative explanations and related endogeneity concerns.     

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.     

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.     

The size of venture capital and private equity fund portfolios

We propose a model that examines the optimal size of venture capital and private equity fund portfolios. The relationship between a VC and entrepreneurs is characterized by double-sided moral hazard, which causes the VC to trade off larger portfolios against lower values of portfolio companies. We analyze the structural relations between the VC's optimal portfolio structure and entrepreneurs' and VC's productivities, their disutilities of effort, the value of a successful project, and the required initial investment in a venture. We also test the model's predictions using a small proprietary dataset collected through a survey targeted to VC and private equity funds worldwide.     

董事高管责任保险、权益资本成本与上市公司再融资能力

基于公司治理角度,使用2002~2012年沪深引进董事高管责任保险的上市公司为样本,考察了董事高管责任保险、权益资本成本和上市公司再融资能力三者之间的相互关系。研究表明：董事高管责任保险与上市公司的再融资能力负相关,与权益资本成本呈显著正相关关系;权益资本成本在董事高管责任保险和上市公司再融资能力影响机制中发挥中介作用。具体地,投资者因规避责任保险机制庇护下公司高管自利行为可招致的风险,导致上市公司权益资本成本增加,从而降低了公司再融资能力。     

The dark side of audit market competition

This paper examines the relation between audit market competition and audit quality. We use the staggered introduction of bullet trains in different Chinese cities as shocks to travel time between audit clients and prospective audit firms, which increases the threat of competition for incumbent audit firms. The inception of bullet train connectivity leads to a 4.5 percentage point (pp) increase in the probability of GAAP violations and a 1.7 pp decrease in the probability of modified audit opinions for clients headquartered in connected cities. Bullet train connectivity is also followed by a 1.6 pp decrease in income-decreasing audit adjustments but no change in income-increasing audit adjustments. The negative relation between bullet train connectivity and audit quality is 1) stronger when bullet trains put greater competitive pressure on incumbent auditors and 2) weaker when clients demand high audit quality. Our paper provides plausibly causal evidence that competition lowers audit quality.     

“Non‐Financial” Is a Misnomer,but Doesn't Have to Be a Missed Opportunity

With enterprise values now representing increasing multiples of companies' net book assets, investors are clearly looking beyond financial reporting for enhanced insights and understanding of when and how companies are adding value. This shift includes growing attention to environmental, social, and governance (ESG) information. Although ESG data presents its own unique challenges, dismissing it as “non‐financial” can be misleading. When explicitly linked to a company's long‐term value creation strategy, ESG information can serve as a valuable input to more farsighted financial analysis. Market‐driven initiatives, notably that of the Sustainability Accounting Standards Board (SASB), aim to standardize a subset of business‐critical, industry‐specific sustainability data for investors. Research indicates such approaches can generate positive outcomes not only for providers of financial capital, but for their portfolio companies and markets in general. In illustrating these concepts, the authors explore ESG impacts in three sectors and industries, while examining how access to consistent, comparable, reliable sustainability information in those sectors can augment an analysis of traditional business fundamentals. One example focuses on water management in the Oil & Gas Exploration & Production industry, a major environmental issue where geographic considerations can shed light on company‐specific exposures to cost increases, production disruptions, increased CapEx and R&D spending, as well as the potential for asset write‐downs. In the Food & Beverage sector, health and nutrition concerns are shown to be changing consumer preferences, triggering regulatory action, and reshaping companies' product portfolios—with significant implications for the companies' brand values and ability to compete for market share. Finally, in Aerospace & Defense, lapses in business ethics such as bribery of government officials present a governance challenge that comes with the risk of value‐destroying fines and penalties and, even more significant, associated reductions in revenues.     

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.     

GOLBALIZATION, CORPORATE FINANCE, AND THE COST OF CAPITAL

International financial markets are progressively becoming one huge, integrated, global capital market—a development that is contributing to higher stock prices in developed as well as developing economies. For companies that are large and visible enough to attract global investors, having a global shareholder base means having a lower cost of capital and hence a greater equity value for two main reasons: First, because the risks of equity are shared among more investors with different portfolio exposures and hence a different “appetite” for bearing certain risks, equity market risk premiums should fall for all companies in countries with access to global markets. Although the largest reductions in cost of capital resulting from globalization will be experienced by companies in liberalizing economies that are gaining access to the global markets for the first time, risk premiums can also be expected to fall for firms in long-integrated markets as well. Second, when firms in countries with less-developed capital markets raise capital in the public markets of countries (like the U.S.) with highly developed markets, they get more than lower-cost capital; they also import at least aspects of the corporate governance systems that prevail in those markets. For companies accustomed to less-developed markets, raising capital overseas is likely to mean that more sophisticated investors, armed with more advanced technologies, will participate in monitoring their performance and management. And, in a virtuous cycle, more effective monitoring increases investor confidence in the future performance of those companies and so improves the terms on which they raise capital. Besides reducing market risk premiums and improving corporate governance, globalization also affects the systematic risk, or “beta,” of individual companies. In global markets, the beta of a firm's equity depends on how the stock contributes to the volatility not of the home market portfolio, but of the world market portfolio. For companies with access to global capital markets whose profitability is tied more closely to the local than to the global economy, use of the traditional Capital Asset Pricing Model (CAPM) will overstate the cost of capital because risks that are not diversifiable within a national economy can be diversified by holding a global portfolio. Thus, to reflect the new reality of a globally determined cost of capital, all companies with access to global markets should consider using a global CAPM that views a company as part of the global portfolio of stocks. In making this argument, the article reviews the growing body of academic studies that provide evidence of the predictive power of the global CAPM as well as the reduction in world risk premiums.     

The effect of sovereign wealth funds on corporations: Evidence of cash policies in Singapore

This paper studies the monitoring role of sovereign wealth funds (SWFs). By using unique dataset from one of the largest SWF: Temasek holdings, we find that SWF’s presence has a positive effect on cash holdings of portfolio companies. The effect is more pronounced for well-governed firms, indicating that Temasek increases corporate cash holdings through its active role in corporate governance. We further find supportive evidence that Temasek ownership affects cash holdings by hoarding excess cash and reducing capital expenditure, especially within firms with good governance. Temasek’s discerning effect on cash policies highlights the effective monitoring role of sovereign wealth funds.     

Companies' Financial Decisions Under the Distributed Profit Taxation Regime of Estonia

This paper empirically analyzes companies' capital structure and dividend decisions under distributed profit taxation (DPT), Estonia's corporate taxation regime since 2000. The sample covers 26,000 observations of Estonian companies from 1995 to 2004. The results show that the DPT system has led companies to pay less in dividends and retain more profits. Simultaneously, the importance of external financing in companies' total capital has decreased. The undistributed profits appear to be partially retained as surplus cash, instead of being reinvested into long-term productive assets. DPT seems to support companies' liquidity and sustainability; however, the allocation of funds is potentially inefficient.     

Venture capital reputation and investment performance

I propose a new measure of venture capital (VC) firm reputation and analyze its performance implications on private companies. Controlling for portfolio company quality and other VC-specific factors including experience, connectedness, syndication, industry competition, exit conditions, and investment environment, I find companies backed by more reputable VCs by initial public offering (IPO) capitalization share (based on cumulative market capitalization of IPOs backed by the VC), are more likely to exit successfully, access public markets faster, and have higher asset productivity at IPOs. Further tests suggest VCs’ IPO Capitalization share effectively captures both VC screening and monitoring expertise. My findings have financial implications for limited partners and entrepreneurs regarding their VC-sorting activities.     

CARE Conference Hong Kong Polytechnic University,June 9, 2014: Equity Financing for Early‐Stage Companies in China

Many of the smaller private‐sector Chinese companies in their entrepreneurial growth stage are now being funded by Chinese venture capital (VC) and private equity (PE) firms. In contrast to western VC markets, where institutional investors such as pension funds and endowments have been the main providers of capital, in China most capital for domestic funds has come from private business owners and high net worth individuals. As relatively new players in the market who are less accustomed to entrusting their capital to fund managers for a lengthy period of time, Chinese VCs and their investors have shown a shorter investment horizon and demanded a faster return of capital and profits. In an attempt to explain this behavior, Paul Gompers and Josh Lerner of Harvard Business School have offered a “grandstanding hypothesis” that focuses on the incentives of younger, less established VCs to push their portfolio companies out into the IPO market as early as they can—and thus possibly prematurely—to establish a track record and facilitate future fundraising. This explanation is supported by the under‐performance of Chinese VC‐backed IPOs that has been documented by the author's recent research. Although they continue to offer significant opportunities for global investors, China's VC and PE markets still face many challenges. The supervisory system and legal environment need further improvement, and Chinese funds need to find a way to attract more institutional investors—a goal that can and likely will be promoted through government inducements.     

风险投资声誉和股价“传染”效应——来自中国上市公司立案公告的证据

本文以我国2007-2015年证监会立案调查事件为样本,研究当风险投资支持的上市公司涉嫌违规,同一风险投资所支持的其他上市公司(即关联公司)的股价是否会被“传染”。实证结果表明,有风投背景的上市公司在立案公告日有显著的负面市场反应(约-8%),并且这种负面反应会通过共同的风险投资链条“传染”给关联公司(约-1.2%)。我们还发现,风险投资机构的声誉越高,风险投资对涉嫌违规企业参与度越高,则立案调查事件对风险投资的声誉损害越严重,市场对关联上市公司的惩罚也越严重。     

Corporate governance performance ratings with machine learning

We use machine learning with a cross-sectional research design to predict governance controversies and to develop a measure of the governance component of the environmental, social, governance (ESG) metrics. Based on comprehensive governance data from 2,517 companies over a period of 10 years and investigating nine machine-learning algorithms, we find that governance controversies can be predicted with high predictive performance. Our proposed governance rating methodology has two unique advantages compared with traditional ESG ratings: it rates companies' compliance with governance responsibilities and it has predictive validity. Our study demonstrates a solution to what is likely the greatest challenge for the finance industry today: how to assess a company's sustainability with validity and accuracy. Prior to this study, the ESG rating industry and the literature have not provided evidence that widely adopted governance ratings are valid. This study describes the only methodology for developing governance performance ratings based on companies' compliance with governance responsibilities and for which there is evidence of predictive validity.     

Financial Globalization,Governance, and the Evolution of the Home Bias

We merge portfolio theories of home bias with corporate finance theories of insider ownership to create the optimal corporate ownership theory of the home bias. The theory has two components: (1) foreign portfolio investors exhibit a large home bias against countries with poor governance because their investment is limited by high optimal ownership by insiders (the “direct effect” of poor governance) and domestic monitoring shareholders (the “indirect effect”) in response to the governance and (2) foreign direct investors from “good governance” countries have a comparative advantage as insider monitors in “poor governance” countries, so that the relative importance of foreign direct investment is negatively related to the quality of governance. Using both country‐level data on U.S. investors' foreign investment allocations and Korean firm‐level data, we find empirical evidence supporting our optimal corporate ownership theory of the home bias.     

Comply or Explain: Investor Protection Through the Italian Corporate Governance Code

Nearly 86% of listed Italian companies now claim to be in formal compliance with the provisions of the Italian Corporate Governance Code, which, like many codes in EU countries, give companies the option to either comply or explain their decision not to do so. But in the wake of the recent financial crisis, the effectiveness of such self‐regulatory corporate governance codes has been subjected to increasing skepticism. In particular, critics wonder whether such governance codes actually encourage the adoption of best practices and promote better governance. This article presents a governance indicator (CoRe) devised by the authors that attempts to assess the actual, or effective, levels of compliance with the Italian Corporate Governance Code in terms of listed companies' procedures for dealing with related party transactions (RPTs). The authors report that the companies' level of effective compliance with regard to RPTs is considerably lower than their publicly reported levels of formal compliance. The authors also report that higher levels of effective compliance tend to be found in companies where (1) minority shareholders have appointed one or more directors; (2) independent directors serve on important committees; and (3) there are significant holdings by institutional investors—particularly foreign investors—who participate in general shareholder meetings.