Venture capitalist reputation and the long-run performance of China's initial public offerings

Abstract

China has experienced significant growth in the Initial Public Offering (IPO) market during the last decade. During this period, venture capital (VC) has been playing an increasingly important role in the IPO market. The main aim of this thesis is to empirically examine the impact of both VC-backing and VC reputation on the long-run performance of Chinese IPOs, and to explore whether the impact is subject to where the IPO get listed, e.g. ChiNext Board (a Nasdaq-type Board in China). The thesis measures IPO performance with both share price performance and operating performance. In particular, the former is measured as the buy-and-hold abnormal returns, where the each IPO has its own matched portfolio as the benchmark. The latter is measured by the return on equity. These measures are calculated for up to three years post IPO. Significantly, this thesis acknowledges the wide range of possible metrics that can be used for measuring reputation and examines the importance of metric choice on the performance measurement outcomes. A special feature of the reputation used in this thesis is the use of a real-world and market-based ranking measure for VC reputation created by the Zero2IPO Research Group for the China market, which is more multifaceted than many of the traditional proxies for reputation used in earlier studies. This thesis constructs a crosssectional sample consists of more than 1000 IPOs listed during the nine-year period from January 2004 through December 2012. The thesis finds that although IPOs generally experience long-run underperformance in the Chinese stock market, VC-backed IPOs show better long-run performance than their nonVC-backed counterparts. In addition, there is some evidence that the higher the VC’s reputation, the better their invested IPOs perform in the stock market relative to non-VCbacked IPOs. This pattern is driven primarily by IPOs listed on the ChiNext Board (a Nasdaq-type Board), and the results are independent of reputation proxy. However, within the sample of VC-backed IPOs, the difference in performance between IPOs backed by highreputation VCs and those backed by lower-ranked VCs is found not to be statistically significant and so this study is unable to provide conclusive evidence that VC reputation influences the performance of VC-backed IPOs. In the case of operating performance, neither VC-backing nor VC reputation affect post-IPO performance significantly. This is likely due to the limited forward-looking characteristics of historic accounting data, especially for earlystage and hi-tech firms. These results are robust to a range of additional tests. The thesis brings forward some important policy implications based on the results. For example, the government should broaden the sources of funding to make private VC to participate more into the IPO market, provide more favourable tax policies to VC and encourage more involvements from VCs.