The Market Effect Of Venture Capital In IPO On GEM

The unsmooth exit mechanism of venture capital is improved when SME and GEMwere launched in2004and2009respectively. The invested company is listed on the GEM, bywhich venture capital achieves high return and it stimulates the great development of venturecapital. IPO is the best way for venture capital exiting the holding company. Venture capitalinevitably takes part in the company’s supervision, management and the process of IPO inorder to get high benefit. The paper tries to analyze the mechanism of venture capital’sfunction in the process of IPO. The empirical test of venture capital’s market effect in IPO isdone by using the sample data of GEM. It also tests the performances of the certificationhypothesis, monitoring hypothesis, adverse selection hypothesis and market powerhypothesis, which is put forward by foreign scholars.This paper established a dynamic game model with incomplete information to issueenterprise, underwriters, venture capitalists and investors to analyze the main mechanism ofventure capital in the IPO business. The results are:(1) the underwriter, motivated by profitmaximization, would lower the issuing price of the stock in order to attract the uninformedinvestors, so that under-pricing appears.(2) The certification role of high-reputation venturecapital tends to improve the capacity of recognizing the quality of enterprise project and theventure capital, motivated by profit maximization, tends to raise the issuing price ofhigh-quality enterprise, so that the under-pricing reduces. But low-reputation venture capitaldoes not have this function.(3) The IPO prices of high-reputation VC-backed enterprise arehigher than those of low-reputation VC-backed enterprise in average. The IPO prices ofVC-backed enterprises are higher than those of Non-VC-backed.We select the354listed companies in Shenzhen Growth Enterprises Market from2009to2012as the sample.207VC-backed enterprises and147Non-VC-backed enterprises areselected by checking the IPO prospectus, the CVSource database of ChinaVernture and theZBD database of Zero2ipo Group. We verify the functions and effects by using difference testand multiple linear regressions.The results show (1) the reputation of underwriters hired by VC-backed enterprises is significantly higher than that of Non-VC-backed enterprises, whichverify the certification hypothesis. But venture capital has insignificant influences onunderwriting rates. It indirectly enhances the underwriting rates because it chooses higherreputation underwriters in the process of IPO.(2) Venture capital’s monitoring function exists,but adverse selection function does not exist. The performances of VC-backed enterprises arebetter than that of Non-VC-backed enterprises. However, the differences are narrowed andsome indexes are enven inversed after entering the market. The profit motive of venturecapital is gradually reduced after IPO and it cannot implement long-term monitoringfunctions.(3) Venture capital can significantly improve the P/E ratio, which indicatesventure capital has significant influences on pricing on primary market.(4) VC-backedenterprises can attract more institutional investors and more securities analysts taking part inthe process of IPO. There is no direct significant influence of venture capital on the first dayof trading volume and turnover. But venture capital attracts more analysts to provide researchreport and more institutional investors to take part in the first day trading. Thus, the first dayof trading volume and turnover are increased.(5) In the first two months of IPO, the initialretures of VC-backed enterprises are higher than that of Non-VC-backed. However, thedifferences are gradually narrowed. And it would be inversed after three months. It verifiesthe market power hypothesis. Venture capital attracts more participants so that the initialreturns are improved.(6) Venture capital has direct significant influences on the underpricingon the first day of launching market. The underpricing of VC-backed enterprises is higherthan that of Non-VC-backed enterprises when more analysts and institutional investors areattracted. Venture capital’s comprehensive market effect improves the underpricing ofVC-backed enterprises.(7) We test the VC-backed enterprises by using the207sub-sampleand found that high-quality investment has insignificant influence on the under-pricing of theprimary market and secondary market. The limited partnership venture capital has significantinfluence on the under-pricing in the primary market. But in the secondary market, it does notshow more significant influence than corporate venture capital. The venture capitals withnational capital background have significant influences on the under-pricing both in primarymarket and secondary market. It raises the issuing earnings and lowers the under-pricing ofthe enterprises.