Do foreign and domestic venture capital firms differ in replacing CEOs of portfolio companies?

Abstract

ABSTRACT Using a sample of 5,383 investment events of venture capital firms (VCs) investing in Chinese companies between 1997 and 2017, we investigate how levels of human capital of chief executive officers (CEOs) of portfolio companies affect tendencies of foreign and domestic VCs to replace CEOs. We find that domestic and foreign VCs are similar in that they are both less likely to replace CEOs of their portfolio companies if CEOs have higher levels of human capital. Furthermore, we find that domestic and foreign VCs exhibit significant differences in CEO replacement when not considering CEO human capital or when CEOs have lower levels of human capital. Results are consistent with our hypotheses that foreign VCs rely on CEO human capital as a stronger quality signal than domestic VCs, because they have more difficulty monitoring CEOs’ post-investment performance. On the contrary, the geographical and cultural proximity of domestic VCs enables them to obtain information other than CEO human capital, such as CEOs’ social skills, potential, entrepreneurial passion, and charisma, to make replacement decisions. The study advances our understanding of the behavioral differences between domestic and foreign VCs in the post-investment management process.