Risk Investment And Growth Option, Research On The Influence Of The Start-up Market Valuations

The sound development of start-ups has great significance for the promotion of thetransformation of China’s economic growth and implementation of innovative nationalstrategy during the present stage. With the influence of their characteristics of high riskand high-asymmetric information, start-ups have been confronted with difficulties infinancing. The launch of the Growth Enterprise Market (GEM) in Shenzhen StockExchange, not only improves the dilemma of financing difficulties of start-ups, but alsoprovides an effective exit channel for Venture Capital (VC), and thus promotes a newround of entrepreneurial activity. Nevertheless, the high yield in the first day and highsecondary market price-earnings ratio of the start-ups in GEM have suffered from greatattention and controversy during the past two years, which naturally makes the marketvaluation of start-ups become the hot issue at present.Based on the introduction of the research’s background and significance, as well asrelated theoretical reviews, this paper uses a sample of281start-ups listed on the GEMin the Shenzhen Stock Exchange form October2009to December2011, and empiricallyexamines the effects of Venture Capitalists (VCs) and the degree of their participationon the IPO underpricing, and the impact of growth option pricing on the valuation in thesecondary market for start-ups.On the aspect of the valuation in the primary market, the results of empiricalresearches, which focus on the effects of venture capitals and their degree ofparticipation on the start-ups’ IPO underpricing, show that the possible collusionbehavior of venture capitalists with to be listed firms driven by high exit returns,coupled with the existence of the grandstanding motivation of young venture capitals,make the VC-backed enterprises have a higher underpricing than non-VC-backed ones.However, with a sub-sample of124VC-backed firms, our regression shows that theIPO underpricing decreases as an increase of the VCs’ equity shares and investmentduration, this finding indicates that the deeply involvement in the backed firm will makeVCs play a certification role and then to some extent help firms which to be listed cut down their IPO underpricing.On the aspect of the valuation in secondary market, we measure and compare theproportion of growth options between the enterprises in GEM and the high-techenterprises in Main Board (including SME). We focus on the effect of proportion ofgrowth options on the market valuation, as well as the revealing degree of growthoption value in the market valuation of enterprises listed on the different boards. Theresearch finds that compared with the sample enterprises in Main Board, the start-ups inGEM have higher proportion of growth options in the secondary market valuation. Atthe same time, the proportion of growth option has a significantly positive relationshipwith the market valuation, which is the reason that the start-ups of GEM have a highermarket valuation undoubtedly. Moreover, GEM is more capable of reflecting growthoptions into its market valuation, compared with the Main Board, which is largelyrelated to the original intention of establishing the GEM and the risk preference attitudeof investment group of GEM.