上市公司的私募角色

The Role of Venture Capital in Listed Companies: Evidence from Mainland China Ming Sun , Sihai Fang * School of Management and Economics, University of Electronic Science and Technology of China Chengdu 610054, China Abstract: We empirically examine the role of venture capital in VC-backed listed firms in Mainland China using the data of SME Board of ShenZhen Stock Exchange from June 2004 to June 2007. Contrary to the evidence from the US, we find that the VC-backed firms in Mainland China experience higher underpricing, which is not owing to the lower pricing in the primary market but the investors in the second market are too optimistic about the prospect of the VC-backed firms. In addition, the pre- and post-IPO operating performance of VC-backed firms is significantly better than that of nonVC-backed ones. Our finding supports the monitoring hypothesis that the VC-backed firms perform better than nonVC-backed firms before and after IPO for the monitoring of VC funds. Moreover, it is found that high-reputation VC-backed firms have a better post-IPO operating and market performance compared to low-reputation VC-backed ones, which is consistent with the grandstanding hypothesis proposed by Gompers (1996). However, there is no evidence to support the certification hypothesis proposed by Megginson and Weiss (1990) that VC-backed firms have a lower underpricing in the IPO performance. JEL classification: G24; G32 Keywords: Venture Capital; IPO; Mainland China Thanks for the supports by National Natural Science Foundation of China (70673008/G0302). This paper has been accepted for presentation at the 21st Annual Meeting of the Academy of Entrepreneurial Finance in September 23-25, 2009, Chicago, Illinois, US. * Corresponding author. E-mail: sunming0909@126.com; Tel.:+86-15011323397 (Beijing) 1. Introduction The role of venture capital in the creation of public companies has attracted many scholars and practitioners. Venture capitalists are described as experts in the field of high-risk company funding, not only because they specialize in particular industries and use their knowledge to help the company recruit key employees, improve the relationship between suppliers and customers, but because they assist in operation and financing Thus, venture capitalists are typically active investors, trying to add value to their portfolio companies. However, conflict of interests may bring some negative influence to VC investment. In this paper, based on the effects of venture capitalists’ participation in listed companies in the biggest emerging market in the world, we draw some more realistic conclusions through an empirical test of three possible hypothesis (certification, screening/monitoring and grandstanding) in the role of venture capital. Most of the previous research focus on developed countries (e.g., US, Europe and Japan). Our study is one of the few empirical studies in the emerging markets, e.g. Mainland China, where venture capital industry has developed rapidly in recent years. The role of venture capital in initial public offerings is debated in the finance literatures. Megginson and Weiss (1991) report that VC-backed IPOs are less underpriced than nonVC-backed IPOs during 1983-1987, and attribute the difference to the “certification” role of venture capital in the IPO process. Barry et al (1990) focus on the monitoring of venture capitalists in IPOs between 1978 and 1987, and find the ownership and the length of the board service are negatively related to IPO underpricing. In broader terms, maybe these firms are of better quality than nonVC-backed firms; this hypothesis is called “screening”. Both screening and monitoring will lead to similar results, namely, high quality of VC-backed companies. Since the publication of the above two seminar papers, a lot of study tries to understand the role of venture capital. Sahlman (1990) points out that although a typical large venture capital firm receives up to 1,000 proposals each year, it invests in only a dozen or so new companies. Jain and Kini (1995) observe that VC-backed companies exhibit superior post-IPO operating performance compared to nonVC-backed companies. Brav and Gompers (1997) test the long-run performance of VC-backed and nonVC-backed IPOs using equally weighted returns. They find that VC-backed firms significantly outperform nonVC-backed firms, however, using value weighted and the Fama and French (1993) three-factor hypothesis, they find that only small and nonVC-backed IPOs underperform. Baker and Gompers (2003) note that venture capitalists own seats in the board of directors and monitor the whole process of growth of the company. These studies indicate that VCs add value to the IPO process and post-IPO operating performance of issuing companies. So, VC-backed firms perform better than nonVC-backed firms in and after the IPO process. However, some papers have called the early evidence mentioned above into question. Amit et al. (1990) theoretically propose the adverse selection problem when venture capitalists search for start-ups to invest in. Associated with asymmetric information, VCs attract “lemons” on average because high-quality entrepreneurial firms will be able to come to market without being forced to sell an equity interest to VCs. VC-backed IPOs will be inferior to nonVC-backed IPOs based on this logic. The conflict between venture capitalists and entrepreneurs will also make VC-backed firms perform even worse than nonVC-backed firms. Gompers (1996) proposed “grandstanding” hypothesis. Venture capital firms are usually limited partnerships; these funds have finite lives, typically ten years. In order to raise subsequent funds successfully, young VCs should establish their reputation through taking their portfolio firms public earlier. So, the young venture capitalists act in their own self-interest relative to old VCs and do not optimize the value of the IPOs. Hamao et al. (2000) report similar conflict of interests in a study on VC-backed IPOs in the Japanese market. They find deeper underpricing of securities-affiliated VC-backed IPOs when the leading venture capitalist is also the leading underwriter. Francis and Hasan (2001), Smart and Zutter (2000) find that initial returns of VC-backed IPOs on average are higher than those of nonVC-backed IPOs. Lee and Wahal (2002) document that IPOs of VC-backed firms are more underpriced than those of nonVC-backed firms between 1980 and 2000. In this paper, we focus on Mainland China, an emerging market of more than twenty years of VC history to test the “certification”, “monitoring” and “grandstanding” hypothesis. The local VC market in Mainland China began in 1985 and grew to cumulative pool of RMB 120.6b by 2007. According to the statistics of Library House, Mainland China has already become the second biggest invested country by VCs, only next to US by the end of 2006. Though VC industry has gradually integrated in Mainland China, few empirical studies have focused on the role of venture capital. Investigation in this emerging market can add insights to the understanding to venture capitalists, especially in environments outside of Western Countries. We focus on the VCs’ influence on listed companies by comparing issuing costs, offering pricing, underpricing in the IPO process and aftermarket performance vis-à-vis nonVC-backed firms. In this paper, we empirically study the role of venture capital in and post the IPO performance in Mainland China. We concentrate on the value-added service by venture capitalists reflected in operating market in and after the IPO process and empirically test the three hypothesis (certification, monitoring and grandstanding). The analysis of an emerging market, especially Mainland China, is of special interest, since it has been the second biggest invested country by venture capitalists. Moreover, the Mainland China VC market has gained some importance within financial services industry only in recent years. As a result, only little empirical work is available until now, and little information about the role of venture capital can be got in Mainland China. So, this paper has two objectives: to understand the role of venture capital in such a big emerging market and to compare with those of international studies. The rest of the paper is organized as following: In Section 2, we present three hypothesis of the role of venture capital, certification, monitoring and grandstanding. In Section 3, we describe the data and sample construction，as well as the method of empirical testing. In Section 4, we compare the differences between VC-backed and nonVC-backed firms in and after the IPO process. In Section 5, we compare differences between high-reputation and low-reputation VC-backed firms. And in the last section, conclusion is drawn. 2. Three theoretical hypothesis on the role of venture capital 2.1 Certification hypothesis There are three main hypothesis concerning the effect of venture capital stated in the literature. The first hypothesis is certification hypothesis proposed by Megginson and Weiss (1990). IPO process is characterized by high information asymmetric. Firm insiders have an incentive to conceal bad information, because by doing so they can sell securities at a higher price. Rational outside investors know their incentives and will offer a lower price only if a third-party can certificate that it is a higher quality firm and the third-party is believable for outside investors. The certification role can be performed by venture capital for two reasons. Firstly, venture capitalists hold equity of the firm, own seats in the board of directors and participate in management of the firm with management team of the firm, so they know the firm more than other financial investors. Secondly, as repeated players in the IPO market, venture capitalists are concerned about their reputation in the market. The reputation factor can avoid possible false certification, so the price will be closer to intrinsic value of the firm. As most VC funds are limited partnership with a finite life about ten years, the old reputation is a very import factor for venture capitalists to successfully raise subsequent funds in the future. The two reasons make venture capitalists the best role of certification. Because of the certification of venture capitalists, VC-backed IPOs will have lower underpricing, lower costs and attract higher quality underwriters, auditors and more holding by institutional investors. 2.2 Monitoring hypothesis Besides the certification role in the IPO process, venture capitalists may provide some valuable advice and take an active role in monitoring companies that they have invested. IPO provides a convenient exit strategy; venture capitalists have incentives to work hard to ensure the growth as well as the window-dress the company that pioneers to the issue. Moreover, they could time their offering to coincide with markets peaks to achieve inflated valuations. Venture capitalists not only experience in steering start-up firms but still monitor the portfolio firms they invested and make them perform better than nonVC-backed firms ever after the IPO process because they continue to significantly hold equity and board seats for some years afer the IPO process. The hypothesis is empirically supported by several studies. For example, Sahlman (1990) argues that venture capitalists are involved in the daily operation and often become members of the board of directors. Barry et al. (1990) show that venture capitalists own economically significant equity positions in their portfolio firms, and they participate directly in the governance of their portfolio firms. Brave and Gompers (1997) find that VC-backed firms have a better long-term market performance. Baker and Gompers (2003) show that venture capitalists serve an instrumental role on the director board as monitors. Campbell and Frye (2006) show that VCs’ involvements establish governance systems with characteristics associated with greater levels of monitoring in and after the IPO process. 2.3 Grandstanding hypothesis The grandstanding hypothesis proposed by Gompers (1996) predicts that in order to obtain good reputation, young venture capitalists have the incentive to signal their ability as a market participator to potential investors by bringing firms they invested to the public sooner than old venture capitalists. He also finds that younger VC funds grandstand by taking younger firms public and allowing greater underpricing and following worse post-IPO performance. This enables young VC funds to raise more money than they could. Since the lifetime of a VC fund is typically ten years, venture capitalists must raise follow-on funds to remain active in the VC market. Young VC funds lack reputation, and the performance of the first fund becomes essential for them to raise subsequent funds successfully. In contrast, experienced venture capitalists have typically taken several firms public, and thus have better reputation. As a result, they have relatively less to gain from taking one firm public. Keung (2003) finds that the firms financed by inexperienced venture firms are younger and more underpriced in the IPO process compared to the firms supported by experienced venture capital firms. Lee and Wahal (2003) show that higher underpricing leads to larger future flows of capital into venture funds. And, the degree of underpricing is attenuated for younger venture capital firms. 2.4 Implications of the three hypotheses in Mainland China In Mainland China, it is possible that more than one hypothesis is valid but not completely consistent with the hypothesis. For an emerging market, on one hand, lots of media tend to concentrate on successful stories of entrepreneurs supported by VC funds, which could attract more entrepreneurs to seek help from venture capitalists. A large number of VC funds in Mainland China have international background and are more experienced, so they will monitor their portfolio firms before and after the IPO process. Therefore, VC-backed firms may perform better than nonVC-backed firms. On the other hand, Grandstanding may also be severe in emerging markets as most VC funds are young and inexperienced. Though the parental backgrounds of these firms may be strong, they are not experienced and have low reputation in venture capital industry. In order to ensure the future success of new fundraising for their own survival, they need perfect performance of the first fund. Since they are uncompetitive to gain more promising firms and inexperienced in identifying investment opportunities. So firms invested by low-reputation VC-backed firms may have worse performance in and after the IPO process than high-reputation VC-backed ones. Though there are some bad effects, many entrepreneurs are still willing to seek low-reputation VCs’ investment for the following three reasons. Firstly, entrepreneurs usually know more about technology but less about finance, so they will not realize the negative effect of low-reputation venture capitalists and seek support without concerning the quality of VCs. Secondly, their expectation about value added is not very high. However, they care mainly about the financial capital and the relationship of VC funds in the financial markets. Thirdly, it is difficult for some firms to attract high-reputation VC funds for their low quality compared to the excellent firms, so they have to turn to low-reputation VC funds for lower requirements. The samples are the firms of small or medium magnitude listed on Small and Medium Enterprise Board of ShenZhen Stock Exchange. As is known, bigger underwriters are not willing to underwrite such small or median-sized firms if there is a great deal to do because they can earn more by underwriting large firms. From 2005 to 2007, there are many big firms been taken public, excellent underwriters, auditors and many analysts are busy with these bigger deals, so the quality of underwriters, auditors and the number of analysts may have no significant statistical difference. Therefore, the presence of venture capitalists in IPO process may have no certification effect to public investors. 3. Data Sample and Design of Analysis Our data samples consist of firms listed on Small and Medium Enterprise Board of ShenZhen Stock Exchange of Mainland China from June 2004 (the month in which the first VC-backed firm, Huapond Pharm, was listed) to June 2007. Our data of initial public offerings is collected from a variety of sources. The Pre-IPO and Post-IPO annul reports; firm age, offering dates, offering price, closing price are based on the CSMAR (China Stock Market Accounting Research) database of GTA Company, which is a leading provider of China financial market data, industries and economic data. The information about VC funds is from the book 2. We identify VC-backed firms mainly though top ten 2 Results of China National Soft Scientific Research Project 2004DGQ2K044 are based on a joint investigation by Ministry of Science and Technology, Ministry of Commerce, the National Development Bank. shareholders in the IPO process，if there is a venture capital firm in top ten shareholders, we put it into VC-backed firms, otherwise, nonVC-backed firms. The reputation of venture capital firms is based on China Venture Capital/Private Equity Annual Ranking Released by Zero2ipo Research Center. Top 50 VC funds are considered as high-reputation funds, the left are low-reputation ones. Table 1 presents a descriptive summary for industry distribution of the 139 companies, which consist of 30 VC-backed firms and 109 nonVC-backed firms. In table 1, almost half of VC-backed firms are from Special Equipment Manufacturing, Chemical Materials and Products, Electronic Components Manufacturing, Electrical Machinery and Equipment Manufacturing. VC funds usually tend to focus on risky and high-technology companies. However, many VC funds focus on traditional fields in Mainland China. The main reason is that many international venture capital firms exist in Mainland China, which mainly invests in network, communication Equipment and electronics and other high-technology firms. Since the threshold (profitable for the third consecutive year) of Small and Medium Enterprise Board is much higher than that of foreign and HK GEM, especially the high-technology firms, many high-technology companies supported by international capitals listed on NASDAQ or Hong Kong GEM. To compare VC-backed firms with nonVC-backed ones, we use full samples to test the difference between VC and nonVC-backed firms in and after the IPO process. However, there may be significant difference among different industries. In order to make the results more convincing, we also use the method similar to the one by Megginson and Weiss (1991). That is, each VC-backed company is matched with a counterpart, which is also an IPO company listed on Small and Medium Enterprise Board of Shenzhen Stock Exchange in the same industry (defined by China Securities Regulatory Commission) and similar size, but without VC support. Also, listing years are used to determine the match. In this way, we try to match the sample of VC-backed firms as closely as possible with total assets and offering size in the same industry. Finally, 22 VC-backed firms are matched and 8 VC-backed firms excluded for no appropriate counterparts. Grandstanding may also exists in Mainland China bec