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
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: Suggested Citation