Venture Capital and Private Equity Investors, Governance and Success of IPOs – Evidence from India

Abstract

In this study, we are the first to examine the role of domestic and foreign venture capital and private equity firms (VCPEs) in Indian firms. We find robust evidence to indicate that portfolio firms backed by foreign VCPEs incorporate effective governance structures in the post-IPO period. Specifically, these firms are associated with smaller, more independent and gender-diverse boards. Furthermore, our results suggest that foreign VCPEs continue their association with their portfolio firms in the post-IPO period by nominating directors to the boards. Our results also suggest that portfolio firms backed by foreign VCPEs are associated with better long-term operating performance and profitability. We note that this positive effect is exacerbated by the presence of VCPE nominated directors on the boards. Collectively, our results provide credence to the view that good governance practices are key to long term success of a business, especially in economies that may lack good legal systems, developed financial markets and a variety of alternative investment opportunities and where developing trust between parties involved in a transaction is more important.