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.     

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.     

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.     

The monitoring role of venture capital on controllers' tunneling: Evidence from China

This paper provides evidence supporting the monitoring role of venture capital (VC) in mitigating controlling shareholders' tunneling behavior. We use the staggered introduction of bullet trains in China as shocks to travel time between VCs and portfolio companies, which increases VCs' involvement in portfolio companies' governance. Using a generalized difference-in-difference design, we find that the increased VC involvement induced by the opening of a bullet train route in a city decreases affected portfolio companies' inter-corporate loans by 0.4 percentage points (pp) and the probability of a company violating capital occupation by 6.2 pp. The effect of bullet train connectivity on VC monitoring is more pronounced for companies that are located in cities where are subjected to a larger extent of bullet train connectivity, companies that experience more problematic tunneling, and companies that have looser alternative governance mechanisms. Furthermore, we provide direct evidence supporting the effect of bullet train connectivity on VC involvement by showing that VC directors participate more in the committees and board meetings. Our paper contributes to the literature by providing a plausibly causal effect of VC monitoring on the conflict between the controlling and minority shareholders.     

On Foreign Shareholdings and Agency Costs: New Evidence from China

This article examines the impact of foreign shareholdings on agency costs of Chinese firms from 2006 to 2012. The empirical results indicate that: (1) direct foreign shareholdings, in contrast to indirect foreign shareholdings, improve asset utilization, suggesting low agency costs; (2) qualified foreign institutional investors play a significant role in firms because they are less subject to political pressure, which is consistent with lower agency costs, but this effect could be eroded by government control; and (3) foreign shareholdings reduce the cost of equity and improve firm performance. The results contribute to the privatization of state-owned enterprises and the domestic/foreign ownership structure of firms.     

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.     

Information Asymmetry and Asset Prices: Evidence from the China Foreign Share Discount

We examine the effect of information asymmetry on equity prices in the local A‐ and foreign B‐share market in China. We construct measures of information asymmetry based on market microstructure models, and find that they explain a significant portion of cross‐sectional variation in B‐share discounts, even after controlling for other factors. On a univariate basis, the price impact measure and the adverse selection component of the bid‐ask spread in the A‐ and B‐share markets explains 44% and 46% of the variation in B‐share discounts. On a multivariate basis, both measures are far more statistically significant than any of the control variables.     

Explaining returns on venture capital backed companies: Evidence from Belgium

Using a unique database of 990 VC-backed Belgian firms, we study whether compatibility between corporate and environmental characteristics matters. We address two questions: (i) Does the interplay of company, industry, and product factors affect the expected returns of the VC-backed firms? (ii) Does the joint compatibility between these factors results in a non-linear increase in performance? Panel data analysis shows a significant influence of factor compatibility on returns. Quantile regression analysis indicates a non-linear relationship between the return and its determinants. Conjoint analysis identifies certain combinations of factors, which collapse into classifiable patterns described in the strategic management literature.     

Foreign bank entry and firms’ access to bank credit: Evidence from China

This paper studies the impact of foreign bank entry on domestic firms’ access to bank credit using a within-country staggered geographic variation in the policy of foreign bank lending in China. The paper finds that after foreign bank entry profitable firms use more long-term bank loans; whereas firms with higher value of potential collateral do not. It also finds that non-state-owned firms become able to substitute some trade credit with long-term bank loans. The findings suggest that less opaque firms and non-state-owned firms benefit more from foreign bank entry and that collateral may only play a limited role in mitigating the problem of information asymmetry when creditors’ rights are not well protected in a host country.     

Foreign bank participation and outreach: Evidence from Mexico

Recently, developing countries have witnessed a sharp increase in foreign bank participation. We examine the impact on banking outreach using newly gathered data for Mexico, where foreign bank participation rose from 2% to 83% of assets during 1997–2005. Country-, bank-, and bank-municipality-level estimations show a decline in the number of deposit and loan accounts. While country- and bank-level estimations indicate an increase in the share of municipalities with bank branches and in the likelihood of bank presence, bank-municipality regressions show that only rich and urban municipalities benefited. Overall, the evidence is consistent with a decline in outreach.     

Foreign exchange rate exposure: Evidence from Canada

Using weekly data from 2003 to 2011, this paper examines the presence of exchange rate exposure in thirteen Canadian industry sectors. This study contributes to the literature in a number of ways: (i) it considers the presence of exposure not only in the full sample but also in the pre and post-Global Financial Crisis (GFC) periods, (ii) it considers both linear and nonlinear exposure and (iii) it makes use of the sign and size bias tests to investigate the presence of asymmetric exposure. In general, we find some evidence of linear and nonlinear exposure in the full sample as well as in the pre and post-GFC sub-samples. We also find weak evidence of an asymmetric exposure sign effect on stock returns in the full and pre-GFC sample periods. Stock returns are found to respond asymmetrically to the positive magnitude of exposure in both the-pre and post-GFC sample periods. In overall terms, the GFC appears to have weakly contributed to the overall strength of the exposure.     

外资参与、融资约束与企业生存——来自中国微观企业的证据

生存问题是企业面临的头等重要大事。本文采用1999-2007年期间新成立的非国有企业样本数据刻画了中国企业的生存时间。数据显示非外资参与企业相对于外资参与企业具有较低的生存率。通过使用COX比例风险回归模型发现外资参与确实可以有效缓解企业的融资约束,从而降低企业的失败风险。相比利用外资带来融资约束缓解效应而言,加快金融市场改革、消除基于所有制性质的信贷歧视才是真正缓解民营企业融资约束,进而提升中国企业竞争力的切实有效的路径。     

Financial contracting with strategic investors: Evidence from corporate venture capital backed IPOs

We analyze financial contracting in start-ups backed by corporate venture capitalists (CVCs). CVCs' strategic goals can economically hurt or benefit the start-ups, depending on product market relationships between start-ups and CVC parents. Empirically, start-ups receive funding from both complementary and competitive CVC parents. However, start-up insiders commonly limit the influence of competitive CVCs, awarding them lower board power, while retaining higher board representation for themselves. Second, lead CVCs receive lower board representation, indicating heightened concerns about their greater influence in start-ups' early stages. Finally, start-ups extract higher valuations from competitive CVCs, reflecting greater moral hazard problems. Overall, CVC strategic objectives affect their early inclusion in VC syndicates, their control rights and share pricing.     

Foreign Ownership and Firm Value: Evidence from Australian Firms

The paper employs various measures of foreign ownership and investigates impact of foreign ownership on value of firms in Australia. We find that both, traditional measure and free float measure of foreign ownership has a positive and significant impact on firm value. We also find that foreign institutional holdings in Australian firms’ have a significant and positive impact on firm value. Results are robust to various econometric estimation techniques. Our results have implications for investors and corporate financial policies.     

Investment risk allocation and the venture capital exit market: Evidence from early stage investing

This study provides evidence on how venture capitalists’ (VCs’) allocations of capital to riskier investments, as measured by the proportion of early versus late-stage investment in an industry, are linked to exit market conditions. Prior research has primarily focused on how VCs adjust aggregate investment to public equity market conditions. We develop a more inclusive measure of exit market conditions that accounts for recent secular changes that have affected the industry return structure, specifically, the sharp rise in the number of failures and M&A relative to IPO exits. We show that the dollars gained relative to dollars lost in recent exits and failures are significantly positively related to VCs’ allocations to early-stage companies over the period 1990–2008. The changes in allocations are large enough to have an effect on the availability of funding for early stage companies. In sum, our evidence shows that exit market conditions have a significant and economically meaningful influence on VCs’ allocations to riskier investments.     

Clawbacks and Cronyism: Evidence from China

This paper is the first to examine the long‐term impact on bank lending policy of clawbacks in executive compensation contracts. Using a hand‐gathered database of Chinese business lending, we find evidence of reduced cronyism at the Big Four Chinese banks during the period after the introduction of a clawback program, marking a shift from earlier studies covering earlier time periods that find evidence of widespread cronyism at the Big Four banks. Politically connected borrowers received fewer and smaller loans relative to non‐Big Four banks, consistent with a backlash against cronyism at the Big Four banks. In contrast, we find that cronyism persisted (i.e., politically connected borrowers received more and larger loans) at non‐Big Four Chinese banks where the clawback policy was not effective.     

De-politicization and innovation: Evidence from China

This study analyzes whether the loss of political connections in the Chinese listed firms affects their innovation. Using number of firm patents as a proxy for innovation, we construct a quasi-natural experiment, which focuses on independent directors with political connections were forced to resign due to CPC regulation in 2013 to explore the casual relation between political connections and firm innovation. The baseline results indicate that the innovation output has improved significantly since the promulgation of the Chinese government’s policy in 2013. In addition, we also find two possible underlying channels that firms tend to increase R&D investments and prefer to hire more senior engineers as their independent directors once they lose political ties. The results suggest that de-politicization has been conducive to promoting technological innovation and firms will compensate for their competitiveness weakened by the loss of political connection through two underlying channels in China, which are also confirmed in additional robustness and placebo tests.     

Forward and Futures Prices: Evidence from the Foreign Exchange Markets

Empirical studies of the Treasury Bill markets have revealed substantial differences between the futures price and the implied forward price. These differences have been attributed to taxes, transaction costs, and the settling up procedure employed in the futures market. This paper examines the forward and futures prices in foreign exchange in an attempt to distinguish between the competing explanations.     

Momentum and Foreign Investors: Evidence from the Korean Stock Market

Abstract:

We examine whether the price impact of foreign investors on the Korean stock market from December 2000 to February 2007 generated a momentum phenomenon. In our empirical results, foreigners seem to have exerted a significantly positive impact on prices in “up” markets (periods of positive stock returns), but have had little impact on prices in “down” markets (periods of negative returns). We document that the impact of foreigners’ trades is concentrated in large companies. Most importantly, when the market is in the up state, the returns of stocks of large companies that were positively affected by foreign investors in the previous six-month period continue to increase in the subsequent six-month period. As a result, the subsequent six-month return on a past “winner” stock portfolio is significantly higher than that on a past “loser” stock portfolio. This brings to mind a momentum phenomenon that has been reported not to exist in the Korean stock market.