Whether Venture Capitalist Certification Exists In China

This paper studies the role of venture capitalists backing during IPOs in theChinese stock market.233IPOs from Oct.2009through Jun.2011in the ChiNextmarket are documented in this study, out of which128are VC backed and105are not.The empirical results demonstrates that the initial return of VC backed IPOs is notsignificantly lower than that of non-VC backed IPOs. VC backed IPOs, however, tendto hire more reputable underwriters with larger market shares in their IPOs, especiallythe IPOs backed by VCs with investment banking relationships. In addition, only theIPOs backed by VCs that have investment banking relationships can attract asignificantly larger amount of offline subscription from institutional investors,whereas sole VC backing without investment banking relationship cannot effectivelyincrease the market demand during IPOs.This paper comes to the conclusion that in the ChiNext market, the “certification”function of venture capitalists is not significant. The increase in offline subscriptionrate when there is VC backing in IPO is more attributed to investment bankingrelationships rather than VC certification. The empirical result is more consistent withthe “market power” hypothesis instead of “certification” hypothesis.