Do Venture Capital Firms Play as Supportive Mentors or Free-riders? Evidence from China

Abstract

This paper aims to investigate whether Venture Capital Firms in China play as active investors, who seize to provide the funded entrepreneurial firms monitoring assistance and value-adding service for the performance enhancement, or just act as passive investors, who care little about the growth of the funded firms but the opportunity of freeriding on the IPO process to gain fast and huge economic rents. Utilizing the panel data of listed companies on the Chinese SME Board, this paper employs the PSM methodology and the panel regression models with random effect to control the sample selection bias, and disentangle VC firm’s ex-ante screening effect from the ex-post effect. The analysis reveals that Venture Capital firms are able to select the entrepreneurial firms with superior performance before the first round of VC investment, but fail to enhance the development of funded ventures after the involvement. Although the venture backed firms present the performance superiority over the non-venture backed peers overall, this difference is just attributed to VC firm’s ex-ante screening effects. VC firms do not demonstrate the ex-post value-adding effect, rather to some extent they even exert hampering effect on the performance of funded firms after the investment was made.