Venture Capitalists' Value-Enhancing Activities Under Weak Protection of Law

46 Pages Posted: 21 Jan 2016

See all articles by (Michael) Hui Li

(Michael) Hui Li

La Trobe University

Xiaohui Wu

Xiamen University

Ying Ye

Tsinghua University

Qi Zeng

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Date Written: January 19, 2016


Using two sets of hand-collected survey data, we studied the value-adding activities of venture capitalists (VCs) operating in the weak legal environment of China. VCs exert value-enhancing efforts in addition to monitoring through trust considerations. We identified the effects of three types of trusts, strategic reputation-based (C-trust), knowledge-based (K-trust), and identification-based (I-trust), on a company’s performance while investing venture capital in China. We find that the C-trust acts only through increased use of complementary resources to improve a firm’s performance. K-trust and I-trust can also stimulate in two other ways by reducing transaction costs and improving team-spirit.

Keywords: Venture Capital, Trust, Firm Performance

JEL Classification: G24, K22, L14, M13, O16

Suggested Citation

Li, (Michael) Hui and Wu, Xiaohui and Ye, Ying and Zeng, Qi, Venture Capitalists' Value-Enhancing Activities Under Weak Protection of Law (January 19, 2016). FIRN Research Paper No. 2717977, 2016 Financial Markets and Corporate Governance, Available at SSRN: or

(Michael) Hui Li (Contact Author)

La Trobe University ( email )

Department of Economics and Finance
La Trobe University
Melbourne, 3086

Xiaohui Wu

Xiamen University ( email )

Xiamen, Fujian 361005

Ying Ye

Tsinghua University

Beijing, 100084

Qi Zeng

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


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