The impact of venture capital subscription on price deviation of private placement: evidence from China

Purpose The purpose of this study is to examine the role of venture capital (VC) in supporting corporate growth and innovation through participation in private placements. While VC provides essential financial support to companies, it remains unclear whether this involvement serves a strategic investment role or a purely financial one. This study seeks to elucidate the role of VC by analyzing changes in the price discount of private placements following VC participation. Design/methodology/approach The authors take the private placement events of China A share listed companies from April 2005 to January 2023 as the sample, and examine the influence of VC subscriptions on price discount rate. Findings VC subscriptions to private placements increase information asymmetry, consequently raising the discount rate. This relationship is influenced by the transaction characteristics and information environment. Specifically, VC subscriptions further elevate the discount rate when VC are geographically dispersed from the issuers, possess industry expertise in the issuers’ sector, allocate raised funds for asset restructuring or non-digital investments and when the issuers are in their growth stages. Moreover, the positive correlation between VC subscriptions and the discount rate is more pronounced under conditions of lower internal control quality and weaker external media supervision. Higher discount rates in VC-subscribed private placements result in lower R&D investment and investment efficiency by the issuers, leading to larger-scale VC sell-offs and ultimately diminishing the market and financial performance of the issuers. Practical implications The issuers should diligently assess the behaviors and motives of VC and selectively choose issuance targets and methods to manage risks associated with price deviations in private placements. Additionally, this study recommends that regulatory authorities develop a more detailed regulatory framework that considers transaction characteristics and the information environment. This strategy should help optimize external regulatory measures like media coverage and protect the interests of small and medium-sized investors. Originality/value This study extends research on the “name chasing” motive and certification effect of VC in private placements, enriches the literature on the mechanisms forming discount rates and provides insights for refining regulatory policies on private placements.

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Publication Details

Journal
International Journal of Accounting and Information Management
Published
2024-11-06
DOI
https://doi.org/10.1108/ijaim-05-2024-0165
Primary Topic
Private Equity and Venture Capital
Type
article
Field-Weighted Citation Impact
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article

The impact of venture capital subscription on price deviation of private placement: evidence from China

Xinyi Wen, Jingyi Guan, Yunhui Wen
International Journal of Accounting and Information Management
Private Equity and Venture Capital
article

The impact of venture capital subscription on price deviation of private placement: evidence from China

Xinyi Wen, Jingyi Guan, Yunhui Wen
article en

Abstract

Purpose The purpose of this study is to examine the role of venture capital (VC) in supporting corporate growth and innovation through participation in private placements. While VC provides essential financial support to companies, it remains unclear whether this involvement serves a strategic investment role or a purely financial one. This study seeks to elucidate the role of VC by analyzing changes in the price discount of private placements following VC participation. Design/methodology/approach The authors take the private placement events of China A share listed companies from April 2005 to January 2023 as the sample, and examine the influence of VC subscriptions on price discount rate. Findings VC subscriptions to private placements increase information asymmetry, consequently raising the discount rate. This relationship is influenced by the transaction characteristics and information environment. Specifically, VC subscriptions further elevate the discount rate when VC are geographically dispersed from the issuers, possess industry expertise in the issuers’ sector, allocate raised funds for asset restructuring or non-digital investments and when the issuers are in their growth stages. Moreover, the positive correlation between VC subscriptions and the discount rate is more pronounced under conditions of lower internal control quality and weaker external media supervision. Higher discount rates in VC-subscribed private placements result in lower R&D investment and investment efficiency by the issuers, leading to larger-scale VC sell-offs and ultimately diminishing the market and financial performance of the issuers. Practical implications The issuers should diligently assess the behaviors and motives of VC and selectively choose issuance targets and methods to manage risks associated with price deviations in private placements. Additionally, this study recommends that regulatory authorities develop a more detailed regulatory framework that considers transaction characteristics and the information environment. This strategy should help optimize external regulatory measures like media coverage and protect the interests of small and medium-sized investors. Originality/value This study extends research on the “name chasing” motive and certification effect of VC in private placements, enriches the literature on the mechanisms forming discount rates and provides insights for refining regulatory policies on private placements.

International Journal of Accounting and Information ManagementVol. 33(1)
Guangdong University Of Finances and Economics (CN), Guangdong University of Finance (CN)
Industry, innovation and infrastructure
Openalex Percentile: Top 67%
Private Equity and Venture Capital
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