Venture Capital Exits and the Structure of Stock Markets in China

Abstract

AbstractExisting literature suggests a strong relationship between a vibrant venture capital market and an active stock market: venture capital flourishes when venture capitalists can readily exit from successful portfolio companies through IPOs, and IPOs are in turn facilitated by active and efficient stock markets. This article uses China as a case study to explore the connection between the stock market and venture capital market. Through empirical studies, this article confirms the existing literature by demonstrating a close connection between the stock market and venture capital market in China. It also refines the existing literature by finding that, for venture capital availability, laws and policies also matter in China. Strong and sustained law reforms and government policies aimed at improving the institutional structure and regulatory environment of the stock market can facilitate venture capital-backed exits, which in turn lead to an increase in new venture capital availability in China. Nonetheless, numerous IPO closures have led to freeze-ups in China’s venture capital market. Also, there remain a multiplicity of institutional impediments to the efficient operation of the stock market and the effective implementation of IPO reforms in China. These may in turn hinder the development of the Chinese venture capital industry.