Do Venture Capitalists Play a Monitoring Role in an Emerging Market: Evidence from the Pay-Performance Relationship of Chinese Entrepreneurial Firms?

Pacific Basin Finance Journal, Forthcoming

50 Pages Posted: 10 Sep 2014

See all articles by Jerry Cao

Jerry Cao

Independent

Qigui Liu

Department of Finance and Accounting, School of Management, Zhejiang University

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

Date Written: September 7, 2014

Abstract

This paper investigates venture capitalists’ monitoring of managerial behaviour by examining their impact on CEO pay-performance sensitivity across various controlling structures in Chinese firms. We find that the effectiveness of venture capitalists' monitoring depends on different types of agency conflict. In particular, we find that venture capital (VC) monitoring is hampered in firms that experience severe controlling-minority agency problems caused by disproportionate ownership structures. We provide further evidence that VC is more likely to exert close monitoring in firms that have greater managerial agency conflict, and thus require more direct monitoring. However, controlling-minority agency problems have a greater impact on VC monitoring than managerial agency problems. Overall, our study suggests that venture capitalists' monitoring role is hampered in an emerging market where firms have complex ownership structures that contribute to severe agency conflict between controlling and minority shareholders.

Keywords: Venture capital; disproportionate ownership; the pay-performance relationship; agency problems

JEL Classification: G32, G34

Suggested Citation

Cao, Jerry and Liu, Qigui and Tian, Gary Gang, Do Venture Capitalists Play a Monitoring Role in an Emerging Market: Evidence from the Pay-Performance Relationship of Chinese Entrepreneurial Firms? (September 7, 2014). Pacific Basin Finance Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2492727 or http://dx.doi.org/10.2139/ssrn.2492727

Jerry Cao

Independent

No Address Available

Qigui Liu

Department of Finance and Accounting, School of Management, Zhejiang University ( email )

Hangzhou, Zhejiang Province 310058
China

Gary Gang Tian (Contact Author)

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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