TOWARD A GLOBAL MODEL OF VENTURE CAPITAL?

While the U.S. still accounts for about two‐thirds of the world's total private equity fund‐raising and investment, other countries have been adopting American practices and are experiencing significant growth in their private equity markets. In fact, a case can be made that a global market for venture capital and private equity is emerging, at least in Western Europe and North America, where venture markets are seeing significant convergence in funding levels, investment patterns, and realized returns. To date, however, the European Union has had little success in establishing community‐wide commercial laws, taxation regimes, or corporate governance policies, so each country's private equity funds are organized in segmented national markets, and investment also tends to be largely localized. The Asian markets are even more fragmented: venture capital shows no sign of taking root in Japan, and China lacks the basic legal infrastructure needed to support a vibrant venture capital market. Venture capitalists create value through their role as active investors, and government and business leaders around the world have come to realize that venture capital and private equity investing can be a significant force in promoting economic development and technological progress. In general, countries with English common law codes offer greater protection to inves‐tors; the ratio of venture capital spending to GDP for common law countries is nearly double that in civil law countries. Government efforts to promote venture capital would probably be better focused on eliminating regulatory road‐blocks, lowering taxes, and provid‐ing a favorable investor climate. In the meantime, it appears that pri‐vate equity fund‐raising and invest‐ment have hit their cyclical lows and are poised to surpass $250 billion globally within three or four years and to reach one‐half trillion dollars by the end of the decade. The author also predicts that India, whose history as a former British colony has given it a common law framework as well as system of elite universities and technical institutes known for the quality of its gradu‐ates, should become one of the five leading venture capital markets by the end of this decade.     

DOES VENTURE CAPITAL REQUIRE AN ACTIVE STOCK MARKET?

The United States has both an active venture capital industry and well-developed stock markets. Japan and Germany have neither. The authors argue that this is no accident— that venture capital flourishes especially, and perhaps only , when venture capitalists can exit from successful portfolio companies through initial public offerings (IPOs), which in turn require an active stock market.
Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers, particularly (1) the importance of exit by venture capitalists and (2) the implicit contract over control between venture capitalists and entrepreneurs created by the possibility of exit through an IPO. This possibility gives entrepreneurs a valuable option that, in the event they are successful, allows them to reacquire control of their enterprises from venture capitalists.     

Government venture capital and cross-border investment

We use data on venture capital investments from 26 countries from 1998–2013. We investigate the following questions: Do domestic government sponsored venture capital funds augment or curtail domestic private venture capital funds from cross-border investment? Do government sponsored venture capital funds attract or repel foreign private venture capital investment? The results show that a preponderance of mixed-structured over pure-structured government venture capital investment has a crowding-in effect overall: it attracts domestic and international private venture capital to the domestic venture capital market while simultaneously increasing total private venture capital investment. In contrast, a preponderance of pure-government over mixed-government venture capital fund investment repels foreign private venture capital investment (has a crowding out effect). We find that both these effects are more pronounced for domestic rather than foreign private venture capital and that the attraction effect is stronger than the repulsion effect.     

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.     

Stock Market Valuation,Foreign Investment,and Cross-Country Arbitrage

This study investigates the role of stock market valuation and cross-country arbitrage in shaping foreign direct and indirect investments, contingent upon a country's stage of development. This paper is built upon the mispricing-driven foreign investment hypotheses developed by Baker, Foley, and Wurgler (2009). Interesting findings emerge when developed and emerging markets are considered separately. Empirical evidence indicates that the use of relatively cheap financial capital for foreign investment is prominent among developed countries, but not so in emerging markets. This is largely due to the extremely low level of foreign investment outflows in emerging markets and the inability of unsophisticated emerging market managers to successfully time the market. Further investigation shows that host-country stock market valuation is an important determinant of the mode of foreign investment; investors tend to choose indirect or portfolio investment, as opposed to direct investment, when the stock market is perceived to be undervalued. This is especially the case in emerging markets, where there is more room for misvaluation and potential arbitrage. These findings suggest that the unique institutional features of the markets involved play an important role in shaping foreign investment and cross-country arbitrage.     

Global portfolio investment network and stock market comovement

This paper examines the impact of financial connectedness of countries on international stock market comovement. In recent decades, cross-border capital flows have increased dramatically, and I use bilateral cross-border portfolio holdings to create a global portfolio investment network. Using network analysis, I examine the effect of a country's centrality within this network on stock market comovement while also controlling for the country's trade connectedness. The results show that stock markets of countries that occupy highly central positions within the global portfolio investment network exhibit higher comovement after I control for the level of trade connectedness. Countries that simultaneously occupy highly central positions in both financial and trade networks display even higher levels of stock market comovement. Moreover, linkages derived from total portfolio holdings matter just as much as or more than those derived only from equity linkages.     

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.     

The Determinants of Venture Capital in Europe — Evidence Across Countries

This article analyses the determinants of European venture capital activity. The main novelty of our work is in accounting for the idiosyncrasies of the European venture capital market. In particular, we investigate whether the size of the merger and acquisition market (M&A) is important in explaining venture capital. Moreover, our work is the first that analyses the impact of the degree of information asymmetry at the macro level, the direct impact of the level of entrepreneurial activity and the impact of the unemployment rate on venture capital activity. We use aggregate data from 23 European countries for the period 1998–2003 to estimate panel data models with fixed and random effects. Our results reveal that the size of the M&A market and the market-to-book ratio have a positive impact on venture capital activity whereas the unemployment rate influences the venture capital market negatively. These results highlight the importance of the exit environment and of the degree of asymmetric information for the venture capital market.     

The impact of the Arab Spring and the Ebola outbreak on African equity mutual fund investor decisions

Financial development and stock markets have been widely considered to be key factors in economic growth. Among institutional investors, mutual funds play a key role in providing financial resources to stock markets, particularly in developing countries. Different from other investments, mutual fund flows could be affected by retail investors’ behavior and their overreaction to specific events. We considered 78 equity mutual funds that are geographically specialized in African countries and observed monthly flows and performance for the period of 2006–2015. We find that two major events, Ebola and the Arab Spring, significantly affected the fund flows, controlling for fund performance, expenses and market returns. Retail investors over-reacted to these major events, withdrawing their savings from the African mutual funds. This result is particularly strong when connected to the media coverage of these events: the higher the number of articles about Arab Spring and Ebola, the higher the withdrawals. These irrational investors’ behavior damaged the funds’ managers market timing ability, and reduced the equity capital injection into African stock markets. Our results have several implications for both holders of frontier market mutual funds and the overall asset management industry.     

Stock markets,credit markets,and technology-led growth

The high-tech sector accounts for the majority of corporate innovation in modern economies. In a sample of 38 countries, we document a strong positive relation between the initial size of the country's high-tech sector and subsequent rates of GDP and total factor productivity growth. We also find a strong positive connection between a country's equity (but not credit) market development and the size of its high-tech sector. Our main difference-in-differences estimates show that better developed stock markets support faster growth of innovative-intensive, high-tech industries. The main channels for this effect are higher rates of productivity and faster growth in the number of new high-tech firms. Credit market development fosters growth in industries that rely on external finance for physical capital accumulation but is unimportant for growth in innovation-intensive industries. These findings show that stock markets and credit markets play important but distinct roles in supporting economic growth. Stock markets are uniquely suited for financing technology-led growth, a particularly important concern for advanced economies.     

Biomarker of Quality? Venture‐backed Biotech IPOs and Insider Participation

Corporate financial managers of biotech firms need long‐term financing to reach key milestones, and that requires a long‐ term capital structure. They must balance a mix of investors with different objectives and different investment horizons that includes traditional venture capitalists and also hedge funds and mutual funds. This study helps practitioners understand the complex role of exit decisions, as venture capitalists seek better exit strategies and performance. IPOs are financing but not “exit” moves. In addition to certifying firm value, insider purchasing of shares in the IPO offering has two major consequences. First, venture capitalists reallocate large sums of capital from early‐stage to late‐stage deals that are expected to have lower risk (but also lower expected return) and shorter time to exit. Second, the speed at which VCs exit after the IPO depends on the firm ownership structure after the IPO and the stock liquidity. Going public with a significant participation by venture capitalists will probably increase the post‐IPO ownership and decrease the free float of the stock, implying a delay of the exit and the realization of the capital gains from the investments. Although this study has focused exclusively on the biotechnology industry, insider participation is not unique to it. Biotech's venture brethren in the software and technology industries also have insider participation in IPOs. During 2003–2015, approximately 41 venture‐backed firms outside of the biotechnology sector had insider participation.     

The Effects of Public Venture Capital Investments on Corporate Governance: Evidence From IPO Firms in Emerging Markets

This study examines the impact of public venture capital (hereafter PVC) investments on corporate governance of initial public offering (hereafter IPO) firms in emerging markets. Using data collected from Taiwan PVC investments during 1996–2005, we analyse three corporate governance features in IPO firms: earnings management, board characteristics, and excess control by controlling shareholders. We find that PVC‐backed firms use fewer accounting accruals in their IPO financial statements than non‐PVC‐backed firms. This result suggests that PVC‐backed IPO firms engage in less earnings management than non‐PVC‐backed IPO firms. We also find PVC‐backed firms tend to set up their boards with fewer non‐independent directors and supervisors at IPO. This result indicates that PVC‐backed IPO firms have better board structures than non‐PVC‐backed IPO firms. Finally, we find that controlling shareholders are less likely to exert excess control in PVC‐backed firms than in non‐PVC‐backed firms. Overall, our results indicate that PVC investments add value to new IPO firms not only in financing their capital needs but also in creating better corporate governance structures in emerging markets.     

Earnings management in the pre-IPO process: Biases and predictors

We analyze a sample of 3,293 IPOs from 29 countries to investigate the firm, industry, and country characteristics related to earnings management during the IPO process. We find that IPO firms tend to have significantly positive discretionary accruals (DCA) both prior to and after the IPO, suggesting that IPO firms tend to engage in pre-IPO earnings management. However, we also find that using a proxy for earnings management in the IPO year may lead to biased conclusions concerning pre-IPO earnings management. Firms that are more likely to need access to capital markets in the future (firms with high leverage, and firms backed by a venture capitalist) are less likely to engage in pre-IPO earnings management. Firms operating in countries with a superior rule of law are also less likely to engage in earnings management. Lastly, we find that firms may engage in pre-IPO earnings management in part to avoid returning to the capital markets to raise more funds (capital market staging). This result is robust to possible endogeneity bias stemming from management self-selection.     

The determinants of venture capital funding: evidence across countries

This paper analyses the determinants of venture capital for a sample of 21 countries. In particular, we consider the importance of initial public offerings (IPOs), gross domestic product (GDP) and market capitalization growth, labor market rigidities, accounting standards, private pension funds, and government programs. We find that IPOs are the strongest driver of venture capital investing. Private pension fund levels are a significant determinant over time but not across countries. Surprisingly, GDP and market capitalization growth are not significant. Government policies can have a strong impact, both by setting the regulatory stage, and by galvanizing investment during downturns. Finally, we also show that different types of venture capital financing are affected differently by these factors. In particular, early stage venture capital investing is negatively impacted by labor market rigidities, while later stage is not. IPOs have no effect on early stage venture capital investing across countries, but are a significant determinant of later stage venture capital investing across countries. Finally, government funded venture capital has different sensitivities to the determinants of venture capital than non-government funded venture capital. Our insights emphasize the need for a more differentiated approach to venture capital, both from a research as well as from a policy perspective. We feel that while later stage venture capital investing is well understood, early stage and government funded investments still require more extensive research.     

我国风险投资退出方式的选择

风险投资在现代经济中具有举足轻重的作用,选择合适的方式退出是风险投资成功的关键。本文结合目前我国风险资本的退出现状,分析中国风险投资退出的主要障碍在于相关法律法规不健全、中介服务不成熟、风险企业在国内主板上市难度大,指出了在我国目前的国情下,可供选择的风险投资退出方式有收购与兼并、买壳或借壳上市、境外二板上市或国内中小企业板上市、股份回购、通过区域性产权交易市场退出等。     

What lures cross-border venture capital inflows?

We investigate if economic factors drive gross and net cross-border venture capital inflows differently. Using a dataset of venture capital investments in European and North American countries from 2000 to 2008, we find that higher expected economic growth goes hand in hand with higher gross as well as net inflows, while higher market capitalization and a more favorable environment for venture capital intermediation entail higher gross inflows, but lower net inflows. The latter two findings may suggest that cross-border venture capital inflows partly compensate for potential limits in domestic venture capital supply. However, the findings may also reflect that venture capitalists’ locational decisions depend on the viability of capital markets.     

Venture capital investment cycles: The impact of public markets

It is well documented that the venture capital industry is highly volatile and that much of this volatility is associated with shifting valuations and activity in public equity markets. This paper examines how changes in public market signals affected venture capital investing between 1975 and 1998. We find that venture capitalists with the most industry experience increase their investments the most when public market signals become more favorable. Their reaction to an increase is greater than the reaction of venture capital organizations with relatively little industry experience and those with considerable experience but in other industries. The increase in investment rates does not affect the success of these transactions adversely to a significant extent. These findings are consistent with the view that venture capitalists rationally respond to attractive investment opportunities signaled by public market shifts.     

The role of government in the venture capital market with asymmetric information

Information asymmetry increases the risks undertaken by venture capitalists. The present study departs from the tendency in earlier analyses to attribute the problem of information asymmetry to the entrepreneur only. In view of the obvious social benefits that the development of the venture capital industry brings, the government should take upon itself to consider tax incentives and changes to regulatory policies in order to attract venture capital investments. Three scenarios are portrayed here to examine the issue of asymmetric information in the venture capital market: (1) when both the venture capitalist's and entrepreneur's efforts are observable and the government incentive policy is available; (2) when the entrepreneur's effort is unobservable but the venture capitalist's is observable and government tax incentive is available; and (3) when the entrepreneur's effort is observable but the venture capitalist's effort is unobservable, and regulatory monitoring and government tax incentives are uncertain. This investigation reveals that the tax incentive policy and regulatory measures put in place by the government can significantly and positively affect the outcome of the entrepreneurial project by reducing information asymmetry.     

VC Fund Financial Performance: The Relative Importance of IPO and M&A Exits and Exercise of Abandonment Options

By combining data from two sources, we are able to examine how fund financial performance is related to fund outcomes (initial public offering [IPO] and merger & acquisition (M&A) percentages) and abandonment practices. We also are able to relate fund performance to the track record of the venture capital firm. Our primary findings include: 1) fund IPO and M&A outcomes are statistically significantly related to financial performance, 2) M&A success is around 60% to 80% as important as IPO success in explaining performance, 3) except among the top performers, funds with aggressive exercise of abandonment options outperform those that continue to support a large percentage of their initial investments, and 4) prior performance of the firm, in terms of success percentages and abandonment practices, is significantly related to fund performance. Results are robust to controlling for selection bias of the reporting entities, as well as biases related to looking back at the performance of earlier funds survivorship, and attrition. Quantile regression estimates establish that our results hold across the full range of realized performance levels.     

境内外IPO对企业创新的异质影响研究

基于VC支持的创业企业样本,采用双重差分和三重差分方法,检验境内IPO和境外IPO对企业创新的异质影响。结果显示,境内外IPO通过缓解融资约束促进企业创新,同时加剧管理层短视,从而部分抵消对创新的促进作用。但境外IPO带来的短视问题更严重,因此境外IPO对企业创新的促进作用要弱于境内IPO。