The Effect of Policy Uncertainty on VC Investments Around the World

Journal of Law, Finance, and Accounting, forthcoming.

62 Pages Posted: 11 Oct 2021 Last revised: 11 Oct 2023

See all articles by Lubomir P. Litov

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Xia (Summer) Liu

University of Richmond

Romora Edward Sitorus

The University of Oklahoma

Date Written: October 10, 2023

Abstract

This study documents a significant negative relationship between policy uncertainty and venture capital (VC) investment in startups across emerging venture capital markets (i.e., outside the United States). The adverse effect of policy uncertainty is exacerbated for younger and early-stage startups. By contrast, the effect is attenuated for startups that have headquarters in cities with a high concentration of global VC investment, in countries with more developed stock markets, or if the VC is led by a bank or a corporate entity. Using close national elections to alleviate endogeneity concerns, we find that the baseline results continue to hold. Furthermore, this study provides evidence that uncertainty increases the number of financing rounds, decreases the fraction of investment amount during the first round, and reduces the likelihood of successful exit through acquisition. Finally, we also find that policy uncertainty reduces the amount of cross-border VC investment.

Keywords: Policy Uncertainty, Venture Capital, Entrepreneurial Firms

JEL Classification: G18, G24

Suggested Citation

Litov, Lubomir P. and Liu, Xia and Sitorus, Romora Edward, The Effect of Policy Uncertainty on VC Investments Around the World (October 10, 2023). Journal of Law, Finance, and Accounting, forthcoming., Available at SSRN: https://ssrn.com/abstract=3940017 or http://dx.doi.org/10.2139/ssrn.3940017

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Xia Liu (Contact Author)

University of Richmond ( email )

102 UR Drive
Richmond, VA 23173
United States

Romora Edward Sitorus

The University of Oklahoma ( email )

Price College of Business
307 West Brooks
Norman, OK 73019
United States

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