The Effect Of Venture Capital On Management And Control Right Of Family Firms-Evidence From China

In this paper we investigate whether venture capital firms could affect family firms’ management and ownership, and we think all these venture capital’s value-added services may influence corporate governance of family firms. To investigate the role of venture capital in family firms, we divide our study into three parts. Firstly, the phenomenon of family members’ involving in family firms is significant, therefore venture capital may choose to force some family managers to quit and replace them with unrelated managers. If venture capital does so, what kind of relatives and positions would be the target? Secondly, most family firms have dominated ownership, and to establish a better ownership structure, will venture capital encourage founding-family to sell some shareholdings to outside investors? Lastly, we also want to find out whether participate of venture capital in board of directors facilitates the value-added practice of venture capital.To study these questions, we collect data of499family firms (210venture capital-backed family firms and289no venture capital-backed family firms) and1834family members. We find it is more likely for venture capital-backed family firms to force family managers to quit, and when we divide our sample, we also find affinity managers are easier to leave than consanguinity managers, and supervisors are more likely to quit than other kinds of managers. Further study shows us venture capital-backed family firms are more likely to transfer absolute holding to relative holding, and then reduce cash flow rights, control rights and the separation of cash flow rights and control rights. Surprisingly, founders and consanguinity managers sell ownership to outsiders, but not affinity managers. Lastly, family firms are more willing to receive professionalizing services if venture capital acts as director.The role of venture capital in professionalizing family firm is unstudied in literature. In this paper we investigate whether venture capital firms could affect family firms’ management and control, and our research will profitably marry and enrich these two fields:family firms and venture capital. Most importantly, we establish a new relationship between venture capital and family firms, and our job will help to deeply explore in both family firms and venture capital.