Scandinavian Working Papers in Economics

Stockholm School of Economics Asia Working Paper Series,
Stockholm School of Economics, Stockholm China Economic Research Institute

No 2017-49: Politically Connected Venture Capitalists in China

Xunan Feng and Anders C. Johansson ()
Additional contact information
Xunan Feng: Southwestern University of Finance and Economics
Anders C. Johansson: Stockholm China Economic Research Institute, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: We examine how venture capitalists and the firms they back utilize network-based strategies in China. Analyzing a manually collected data set of venture capitalists with political ties, we find that firms backed by politically connected venture capitalists are more likely to obtain approval for initial public offerings (IPOs), their time from venture capital investment to IPO approval is shorter. They also exhibit higher IPO offering prices and lower underpricing, and consequently deteriorating long-term post-IPO stock performance. By exploiting a unique regulatory change, we show that venture capitalists’ political connections had less IPO applications withdrawn during the 2013 financial inspection period. We also find that firms backed by politically connected venture capitalists have higher levels of earnings management, are more often mentioned in newspaper articles concerning substantial operating performance declines and are more often accused of illegal information disclosures quickly after the IPO. Finally, politically connected venture capitalists can obtain higher investment returns and attract more fund flows after successful IPOs. Our findings are robust to several robustness tests and suggest that political relationships are valuable for this important group of financial intermediaries in transitional China.

Keywords: Venture capital; Institutions; Network-based strategy; Political connections; IPO; China

JEL-codes: D02; G24; P48

73 pages, December 1, 2017

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