The Effect of Venture Capital Investment-Evidence from China's Small and Medium-Sized Enterprises Board

In this paper, we use a matched sample to empirically test the effect of venture capital investment on the companies listed on the Small and Medium-Sized Enterprises Board in China. We find that Chinese venture capitalists neither add value to their invested firms in the initial public offering (IPO) process nor improve operating performance. Rather, compared with their non-venture-backed counterparts, venture-backed firms are associated with a greater level of IPO underpricing and inferior operating performance both before and after IPO. Our findings in China support neither the certification/monitoring hypothesis nor the grandstanding hypothesis, but partly support the adverse selection hypothesis.