The Mechanism Of Venture Capital On Corporate Governance

Chinese enterprises received a total of about6billion U.S. dollars of venture capital equity financing in2011, increasing by8%, while at the same period, the European venture capital equity financing was about6.1billion U.S. dollars (Dow Jones Venture Source statistics). The rapid growth of venture capitals didn’t only benefit the size of economy, but also spawned a large number of high-quality listed companies such as Snda, Baidu (Zhang and Liao,2011). The emergence and development of these venture capitals also provided empirical evidence for the study of how venture capital works.Classic financial theory has a more detailed analysis on the pros and cons of the stock market-based "direct investment" relative to financial intermediary "indirect financing". However, compared to other financial intermediaries, we want to know where is the advantage of venture capital? Or, why investors are willing to invest venture capital rather than other financial institutions or direct investment to entrepreneurs? To answer these questions, a lot of researches have been done, but still not well understood. Current studies mainly focused on how the venture capitals affect the probability of successfully listed (Bottazzi, et al.,2008), the stock’s performance after the IPO (Barry1990; Lerner,1994; Brav and Gompers,1997; Bottazzi, et al.,2008:Chen et al.,2011; Zhang and Liao,2011). However, a little work have been done to study how venture capitals can enhance the performance of the companies, such as how venture capitals can help the company to establish a more efficient governance structure of the Board of Directors (Hellmann,2002; Hochberg,2008), removal of incompetent CEOs, and so on.Using a full sample of listed companies’ information from2001to2011, this paper thus contributes to the literature by investigating whether and how involvement of venture capital in Chinese listed companies affected their mechanism of corporate governance. We focused on in the second tier of the agency relationship, paying attention to venture capital governance’ roles in the development of China’s introduction of venture capital companies, specifically from the following aspects:(1) What are the influences of venture capital on the invested enterprise management incentives? Whether the involvement of venture capital changed and how to change the incentives of enterprises? We are most interested in that the impact of the entry of the venture capital to the company executives’ stake; influences of performance sensitivity of executive pay; influences of the company’s executive compensation viscous.(2) Whether the entry of the venture capital has the signaling role or not, thus changes the company’s dividend policies? What the most important is:whether VC extrudes the company’s cash dividends?(3) How does the venture capital divide the regulation power under the incomplete contracts? Which mean when VC can not sign the complete incentive contracts; and how can they use the external method to divide the control power?We found that Corporations with venture capital background had the stronger executive incentive, which were showed concretely as follows:higher stake of the venture capital background enterprise executives; higher performance sensitivity of executive payment and lower compensation viscous. Our empirical results showed that VC has the positive effect to help enterprise to show their signal to the market, so cash dividends would be "crowded out". And our results also told us that the cash dividends played a weak role in the resolve of the agency relationship. Since the cash dividend payment may be a relatively higher cost of "signal", the role of venture capital could effectively alleviate the pressures due to the payment of cash dividends on the enterprise funds.Based on the incomplete contract theory we got that financial instruments actually provided an allocation of control rights and cash flow of power tools for risk investment institutions, which benefited to resolve the dispute between venture capital enterprise and invested firms. Holdup problem would lead to be lack of prior investment; therefore, the existence of financial instruments will be conducive to a win-win between venture capital and invested firms. This theoretical framework is conducive to understand that one country’s capital market maturity affected the development of venture capital. Based on the empirical researches we also got that venture capital background enterprise financial instruments like convertible bonds had a higher demand, which proved that the financial instruments was vital to the development of venture capital.The paper has six chapters, structural arrangements and the main contents are as follows:The first chapter is the introduction, in this chapter we introduced the background, significance, research ideas and general content arrangements, and pointed out the innovation and inadequacies of this paper.In the second chapter, we summarized the double principal-agent relationships, past researches and system design issues.Using the data of China’s listed companies in the third chapter, we estimated how the venture capital affected the double principal-agent conflict.In the fourth chapter, we selected all A-share listed companies to test the three main assumptions.In Chapter Five, we explored the roles of different finance instruments to reduce the risk of information asymmetry and agency risk, and explained how development level of one country’s financial market impacted the development of venture capital.Chapter Ⅵ is the Summary and Prospect.Overall, our study has the following innovations:Firstly, we have a more systematic elaboration in the double principal-agent problem, and explored the influences for the venture capital to their partners based on the theory.Secondly, in our study, we used large micro-data sample of listed companies to explore:the impact of the intervention of the venture capital to the executives stake; salaries of corporate executives is more sensitive with the venture capital background; the salaries of corporate executives showed sticky problem.Thirdly, when enterprises faced the serious problem of information asymmetry, cash dividend payment would be generally considered the role of "sending signals" to help investors understand the future profitability of the enterprises. Today’s academic researches mainly focused on the ability to transmit information in dividends to become a way of signaling conditions (Aharony and Swary,1980);whether dividend can transmit the information?(Bajaj, and Vijh, 1990; Grullon, Michaely and Swaminathan,2002) and how did the dividend transmit the information?(Grullon, Michaely and Swaminathan,2002), but VC also have the "signal role", whether these two different signaling mechanisms will affect each other? To resolve this question, there is lack of researches; therefore, based on our preliminary studies, we used all A-share listed companies’ data between2001and2011to do empirical analysis.The inadequacies of the article may exist in the followings:First of all, due to the limitations of the topics, the papers did not specifically consider the main functions of venture capital’s "filter" ability. This was mainly due to the actual situation of China Venture Capital and related material collected are difficult to be obtained, especially before the listing, the corporations’data were more difficult to be gathered.Secondly, in our study we used multiple chapters to elaborate how the VC affected all aspects of the start-ups, including contract design and institutional arrangements, because of the venture capital investment makes the relationship between the two parties is very complex, although both manifestations of the agency relationship are summarized in the theoretical foundation chapter of the venture capital, yet we did not refine the common aspects of these contractual relationship with a clear framework, and not fundamentally constructed an unified system to examine the VC’s central functions.Thirdly, the paper studied the relationship between the financial instruments (or financial market) and the development of venture capital based on the incomplete contract framework, and clarified the influences process of the financial instruments to VC theoretically. However, due to the limited empirical data, we could not give stronger empirical evidence to support this inference.Fourthly, this paper is limited to study the executive payment incentives, cash dividend policies and so on, subsequent research can be further expanded to explore risk investment institutions how to affect mergers, acquisitions earnings management and human resources management, and short-term financial risk investment governance mechanisms decision-making. At the same time, to clarify the different nature of different kind of venture capital will help us to know more about the core function of the venture capital.This paper just attempt to study only part of the venture capital of China, both research methods and conclusions still have some shortage, which will be remained for our future studies.