An Empirical Research On Venture Capitalists Exit Behavior And Insider Trading:Evidence From China

This study tries to explore the exit pattern of venture capitalists and insider trading after the lock-up day. We start our research by analyzing the exit pattern of venture capitalists, and then explore their insider trades from three perspectives:their timing behavior around earnings announcements, the information content and market reaction of their insider trading, and finally their exit return.We study these issues using proprietary investment data and trading data of venture capitalists from Jun,2007to Jun,2012. We find that venture capitalists generally sell their stocks fast in the first three months, but then slow down in the rest nine months.We also find that, venture capitalists actually utilize the private information they possess when trading around earning announcements. However, in order to avoid unnecessary litigation risk, they tend to adopt negative trading strategy, that is, the better earnings to be announced, the more shares they will sell, but this behavior can be alleviated by high information transparency. Secondly, venture capitalists’sellsactually contain information about long-run firm performance as we find a negative relationship between sells and long-run firm performance. Finally,after analyzing the abnormal profits venture capitalists get from their insider trades, we find that if venture capitalists hold their shares longer, they can gain better returns.The contributions of this essay are as follows. Firstly, it is the first time, as I know, to analyze the exit pattern of venture capitalists using specific transaction data, instead of using the way they exit as the proxy of their exit pattern and exit return in previous researches. This study would sheda light on the decisions and actions shaping the inevitable exit of venture capitalist after the lock-up day and fill the gap in the empirical research onventure capital exit. Secondly, we study these issues from the perspective of corporate governance and insider trading, which can provide some evidences to regulators in rule-making.