How Does Policy Uncertainty Affect Venture Capital?

61 Pages Posted: 3 Feb 2017 Last revised: 17 Mar 2018

Xuan Tian

Tsinghua University - PBC School of Finance

Kailei Ye

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Date Written: March 12, 2018

Abstract

Using a newly developed policy uncertainty index, we find that policy uncertainty is negatively related to venture capital (VC)’s investment propensity. VCs, however, adjust their investment strategy quickly in response to policy uncertainty changes. Relying on plausibly exogenous variation generated by gubernatorial elections, we show that the relation is likely causal. The negative effect is more pronounced when startups are less mature, have fewer tangible assets, are more dependent on government spending, and are exposed to severer holdup from entrepreneurs. Policy uncertainty also adversely affects VCs’ investment outcomes. In response, VCs stage finance more and cut total investment amount.

Keywords: Venture Capital, Policy Uncertainty, Investment, Exit Outcomes

Suggested Citation

Tian, Xuan and Ye, Kailei, How Does Policy Uncertainty Affect Venture Capital? (March 12, 2018). Available at SSRN: https://ssrn.com/abstract=2910075 or http://dx.doi.org/10.2139/ssrn.2910075

Xuan Tian (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Kailei Ye

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

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