Venture capital market and firm financing： Does Chinese government venture capital certification matter?

Abstract

This study investigates the effect of government venture capital (GVC) investment on the external financing of target firms using samples in China from 2008 to 2022. The research finds that, compared with firms without the investment of Chinese government venture capital (CGVC), those receiving CGVC funding exhibit increased equity financing and additional benefits such as heightened government subsidies and lower cost of equity. The results reveal that CGVC, with its government attributes, provides an endorsement that facilitates equity financing for enterprises. Moreover, this study further tests the mechanism of endorsement through which GVC works. We find that the pronounced market awareness of CGVCs amplifies the positive effects on financing. The market's deeper awareness of CGVC further enhances the government's endorsement effect on firm equity financing. Consistent with our hypothesis, private firms, lacking the government endorsement inherent to state-owned enterprises, benefit more from CGVC investments. This phenomenon supports the notion that the endorsement provided by CGVC is based on its governmental identity rather than CGVC's selection of high-quality enterprises for quality certification. These findings underscore the role of CGVC as a facilitator of government endorsement, significantly enhancing equity financing for the target firms. The results remain robust after several robustness checks.