Venture capital investment and institutional factors: Evidence from China

Abstract

This paper examines how venture capital (VC) investment and institutional factors affect the performance of VC-backed companies in China. We conduct empirical analysis using a sample of companies listed on China’s Growth Enterprise Market (GEM) from 2009 to 2015. Our results show that, compared to non-VC-backed companies, VC-backed companies slightly underperform in terms of profitability but have considerably higher market value. We find that while VC investment does not help companies mitigate the negative impact of institutional factors on profitability, it does convey beneficial effects that help companies moderate the negative impact of institutional factors on market value. We provide further evidence through cross-sectional tests that the impact of VC investment and institutional factors is more pronounced for non-state-owned companies and companies with poor corporate governance.

Keywords: Venture capital; Institutional factors; Investment strategy; Company performance; China

JEL Classification: G24, G30, G32