Stage-specific effects of the Sarbanes-Oxley Act

Innovation in Health Care: Time for a Gut Check

Manuscript Type: Empirical Research Question/Issue: This paper examines whether firm performance at initial public offerings (IPO) is differentially affected by the origin of Venture Capital (VC) firms. Empirical investigations consider both the anti-director index and the anti-self dealing index of the country of origin of a specific VC firm as indicators for its level of legal protection of shareholders' rights. Research Findings/Insights: We find that underpricing of US IPOs is negatively related to the rating of the legal protection rights of VC firms within the VC syndicate of an IPO firm, and the effect is more significant in the subsample of IPOs involving foreign VC firms. There is also evidence of a complementary role played by the legal protection rights of foreign VCs and board independence of IPO firms in reducing underpricing. Further robustness tests confirm empirical findings controlling for the selection bias of IPO firms by foreign VCs, and using the effect of the protection rights of the country of origin of the lead, largest, board member, or oldest, i.e., most experienced, VC firm. There is also evidence of a positive but marginally significant effect of the legal protection rights of VC firms on the long-term performance of their portfolio companies. Theoretical/Academic Implications: Our paper suggests that the institutional framework and national legal differences should matter in considering the effect of VC firms on IPO performance. We find strong support for the institutional perspective whereby institutional predictions were largely supported. Our results also expand on prior research on VC syndication and show that in addition to VC monitoring, the shareholders' protection rights of the country of origin of foreign VC syndicate members would signal the quality of portfolio companies at IPO. Moreover, the complementary role between the legal protection rights of the country of origin of foreign VCs and board independence indicates that firm performance is the outcome of complex mechanisms involving both firm and country-level settings. Practitioner/Policy Implications: Evidence on the association between IPO performance and the origin of VC firms suggests that policy-makers and practitioners should view legal protection of shareholders' rights as a global issue. Since VC investments are valuable for the development of small and medium-size enterprises, our results should contribute to our understanding of cross-border partnering and the quality of partners within the VC industry.

The Crowdfunding Effects on Venture Capital Investments

Venture capital investment in university spin-offs: Evidence from an emerging economy

India has become one of the major recipients of venture capital (VC) in the last decade. It is important to understand if the factors that have played an important role in influencing the VC investment in developed countries are of relevance in the context of developing countries as well. The purpose of the study is to explore the various dimensions of VC investments in India with respect to factors such as industry of investment, stage of investment, round of investment, stake acquired, geographical location, syndication, investor type, etc. and their impact on the amount of investment. A descriptive and empirical research has been carried out using VC investment deals in India during the period from 1st January, 2004 to 31st October, 2016. It is found that the amount of investment by a VC fund in an undertaking is primarily influenced by the stage of investment and the stake acquired. Investor type and industry are also found to have a significant effect on the funding amount. While economic growth and market index are found to have a very small effect on the amount of VC funding, geographical location and syndication donot seem to have any effect on the amount invested.

The rise of venture capital centres in China: A spatial and network analysis

Venture Capital Optimal Investment Portfolio Strategies Selection in Diffusion - Type Financial Systems in Global Capital Markets with Nonlinearities

This paper examines the long-run relationship between venture capital investment and per capita economic growth in the 19 European Economic Area (EEA) countries for the period 1989-2014. We use three different indicators of venture capital (VC) investment, namely VC at early stage investment, VC at later stage investment, and VC total investment. Using cointegration technique, the study warrants the support of long-run relationship between VC investment and per capita economic growth in a few cases, typically with reference to a particular VC indicator and per capita economic growth we use. Using vector auto-regressive (VAR) model for testing the Granger causalities, the study acknowledges mixed evidence of the relationship between the venture capital investment and per capita economic growth in the selected EEA countries, both by individual country and at the panel setting. In some instances, venture capital investment leads to per capita economic growth, lending support to supply-leading hypothesis (SLH) of VC investment-growth nexus. In other instances, it is the per capita economic growth that regulates the level of venture capital investment, lending support to demand-following hypothesis (DFH) of VC investment-growth nexus. There are also circumstances, where venture capital investment and per capita economic growth are mutually interdependent. That is the situation where both are self-reinforcing and offer support to feedback hypothesis (FBH) of VC investment-growth nexus. In addition, there are also instances, where the venture capital investment and per capita economic growth are independent of each other. This is the situation where both are neutral and offer support to neutrality hypothesis (NLH) of VC investment-growth nexus. To summarize, Granger causality results vary from country to country within the EEA countries, depending upon the type of venture capital investment and per capita economic growth that we use in a particular empirical exploration process. The policy implication of this study is that the economic policies should recognize the differences in the venture capital investment and per capita economic growth in order to maintain sustainable development in these EEA countries.

The article examines the impact of information and communication technologies (ICT), innovation, and formal and informal institutions on venture capital (VC) investment. The analysis is based on 28-year data spanning 1990-2017 from 19 European and 13 Asia-Pacific countries using generalized two-stage least square instrumental variable technique. After controlling for endogeneity, the results show that ICT, innovation, and informal institutions hold a strong impact on VC investment. ICT and innovation exert a positive and significant influence on VC investment whereas formal institutions exert a positive yet insignificant effect on VC investment. Among the informal institutions, power distance and individualism exert significant and positive influence whereas uncertainty avoidance has significant and negative influence on VC investment. The interaction analysis demonstrates that the association between ICT and VC is strong when institutional quality is high. Moreover, the impact of innovation on VC is pronounced in highly digitized and highly uncertainty-tolerant environments. Explanation of VC capital investment also vary with geography as the effects of trend, ICT and uncertainty avoidance on VC investment are noticeable in the Asia-Pacific region whereas power distance is prominent in the European region. The article makes important contributions to the literature of VC by revealing novel interactions between formal and informal institutions, ICT and innovation depicted in a conceptual model. The study also brings in important highlights to the policy debate on VC development by showing how exactly VC investments are tangled with the different dimensions of institutional and technological environment.

We examine the effects of venture capital (VC) investment on the performance (measured by return on assets, return on equity, and Tobin's Q) and growth (measured by growth of total sales and total number of employees) of entrepreneurial firms in the People's Republic of China (PRC) after an initial public offering (IPO). Firm-level panel data analysis shows that VC investment contributes to the long-term performance and growth of entrepreneurial firms after an IPO. Meanwhile, we observe a significant and positive relationship between corporate governance of firms and VC investment. However, we do not find that experience or specialization of VC firms influences the effects of venture investment on post-IPO performance or growth of entrepreneurial firms in the PRC.

<p><b>The thesis consists of three empirical essays on corporate finance. In the first essay, we examine the influence of cash flow volatility on firms’ uses of debt maturity and zero-leverage policy in an international context. Using a large international sample, we find that cash flow volatility is positively associated with our measure of debt maturity at less than the 1% level of significance. Relative to unconditional means of debt maturity, a one standard deviation increase in cash flow volatility implies a 2.57% decrease in the probability of firms using long-term debt, a 5.83% increase in the probability of firms using only short-term debt, and an 11.8% increase in the probability of firms using zero-debt. Our results support the screening and the trade-off theories that firms with high cash flow volatility are screened out of the long-term debt market and firms with low cash flow volatility lengthen their debt maturity to moderate expected bankruptcy costs. We also find the qualitatively identical influence of cash flow volatility on debt maturity and zero-debt policy in both advanced and emerging economies.</b></p> <p>In the second essay, we investigate the two-directional relationship between venture capital investment and stock market development around the globe. We employ a two-stage generalized method of moments model using an instrumental variable approach to mitigate the potential reverse causality in this relationship across 19 countries from 1997 to 2015. We find that stock market development positively affects future venture capital investment. A one standard deviation increase in stock market capitalization leads to an 0.87% increase in future venture capital investment. Likewise, we find evidence that venture capital investment positively affects future stock market capitalization. However, this effect disappears with the presenceof stock market capitalization’s lags as explanatory variables in the model. Interestingly, we find that venture capital investments from 5 to 7 years are statistically significant and jointly associated with future stock market development at less than the 1% level, which is consistent with the venture capitalists harvestingtheir investments through initial public offerings 5 years or more after investing in a venture.</p> <p>In the last essay, we explore the influence of venture capital and private equity backing prior to initial public offerings on the listed U.S. firms’ financial policies. We find that, relative to the mean, venture-capital-backed firms have an 18.89% higher cash flow volatility, a 23.12% lower leverage, and a 36.76% higher likelihoodto follow a zero-leverage policy than non-venture-capital-backed firms. In contrast, we find the opposite effects for private equity-backed firms. We also find evidence that the negative effect of venture capital backing on capital structure persists after the initial public offering.</p>

Venture Capital and Clean Technology Investment and Innovation

We examine the impact of crowdfunding on venture capital (VC) investments in the presence of competition among VC firms. Our economic model comprises a startup, a crowdfunding platform, and two VC firms, each with its own perception of the startup’s potential. The startup seeks equity funding from the VC firms and decides on the size of its equity offer. If the VC firms decline to invest, the startup pivots to crowdfunding. Following the crowdfunding campaign, all firms update their beliefs about the startup’s likelihood of success based on the crowdfunding outcome, prompting the VC firms to revisit their investment decisions, now with a reduced equity offer if the crowdfunding outcome was positive. This study provides theoretical underpinnings at the firm level for the observed aggregate-level empirical relationships, both positive and negative, between crowdfunding and VC investments. Specifically, based on our model, the positive relationship, where increased crowdfunding activity leads to a rise in subsequent VC investments, is attributed to startups that fail to secure VC funding in the absence of a crowdfunding platform but succeed in attracting VC attention after a successful crowdfunding campaign. In contrast, the negative relationship is attributed to highly valued startups that could have secured VC funding without crowdfunding, but with crowdfunding, VC firms choose to defer their investment decision until after the crowdfunding campaign’s result is known; on the one hand, a successful crowdfunding outcome lowers their post-crowdfunding VC investment demand, and on the other hand, an unsuccessful outcome deters potential VC investors. Besides these relationships, we also identify another dynamic, where the option of accessing crowdfunding raises VC investment, even if the startup does not actually launch a crowdfunding campaign. This paper was accepted by Sridhar Tayur, entrepreneurship and innovation. Funding: This work was supported by the Natural Sciences and Engineering Research Council of Canada [Grants RGPIN-2015-06757 and RGPIN-2021-04295] and the National Natural Science Foundation of China [Grant 71901135]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.00994 .

The determinants of venture capital funding: evidence across countries

Skin in the Game: An Analysis of Venture Capital Investment in Dermatology from 2002 to 2021