The Effects of Public Venture Capital Investments on Corporate Governance: Evidence From IPO Firms in Emerging Markets

Abstract

This study examines the impact of public venture capital (hereafter PVC) investments on corporate governance of initial public offering (hereafter IPO) firms in emerging markets. Using data collected from Taiwan PVC investments during 1996-2005, we analyse three corporate governance features in IPO firms: earnings management, board characteristics, and excess control by controlling shareholders. We find that PVC-backed firms use fewer accounting accruals in their IPO financial statements than non-PVC-backed firms. This result suggests that PVC-backed IPO firms engage in less earnings management than non-PVC-backed IPO firms.We also find PVC-backed firms tend to set up their boards with fewer non-independent directors and supervisors at IPO. This result indicates that PVC-backed IPO firms have better board structures than non-PVC-backed IPO firms. Finally, we find that controlling shareholders are less likely to exert excess control in PVC-backed firms than in non-PVC-backed firms. Overall, our results indicate that PVC investments add value to new IPO firms not only in financing their capital needs but also in creating better corporate governance structures in emerging markets.

The Role of Multiple Large Shareholders in the Choice of Debt Source

“…In addition to MLSV and BANK_DEBT/TOTAL_DEBT , Equation includes a set of variables that have been shown in prior research to affect insider entrenchment (Ang, Cole, and Lin, ; Florackis and Ozkan, ; Chen, Liao, and Lu, ). These variables are firm size ( SIZE ), firm age ( AGE ), a dummy variable indicating whether the firm is controlled through a pyramidal structure ( PYRAMID ), a dummy indicating whether the firm's controlling owner is a family ( FAMILY_1 ), a dummy variable that is equal to one if the firm's CEO is a member of the controlling family ( CEO_CONTROL ), and industry and year dummies.…”

Industry Peer Firms' Earnings Quality and IPO Underpricing

“…Leone et al () find that disclosure of intended use of proceeds can decrease IPO underpricing significantly by reducing investors' ex ante uncertainty and restricting the dispersion of secondary market. Chen et al (), using a sample of private venture capital (PVC) in Taiwan, find that PVC‐backed IPO firms engage in less earnings management than non‐PVC‐backed IPO firms and have more effective corporate governance measures in terms of more independent directors and supervisors. In summary, the first stream of research suggests that information asymmetry during the IPO process is positively related to IPO underpricing.…”

“…Generally, IPOs tend to have a large positive first‐day initial return, which is referred to as the IPO underpricing phenomenon . IPOs can be underpriced for a variety of reasons including concerns regarding the liquidity and predictability of demand for the IPO, managerial incentivized underpricing to compensate for liquidity and predictability risks, investor push to participate in the IPO process, the possibility of information asymmetry, and corporate governance effectiveness (Beatty & Ritter, ; Chen, Liao, & Lu, ; Leone, Rock, & Willenborg, ; Ljungqvist, ). Prior research (Leone et al, ; Teoh, Welch, & Wong, ; Willenborg & McKeown, ) often focuses on investigating the effect of firms' own characteristics (earnings) on IPO underpricing.…”

“…The second stream of research examines the peer firms' effect in the capital market (e.g., Kim & Ritter, ; Ma, ; MacKay & Phillips, ), showing that the specific firm's financing decision in large part is a response to the financing decision of peer firms. Finally, the third stream investigates the impact of SOX on financial reporting quality by lowering discretionary accruals (Lobo & Zhou, ), reducing accrual earnings management (Ashbaugh‐Skaife, Collins, Kinney, & Lafond, ; Chen et al, ; Cohen, Dey, & Lys, ), stimulating nonprofit organizations to adopt governance measures similar to SOX (Iyer & Watkins, ), and reducing IPO underpricing (Johnston & Madura, ). Our study complements yet differs from these three studies by investigating the link between peer firms' earnings quality and IPO underpricing.…”

Firms in Transition: A Review of the Venture Capital, IPO, and M&A Literature

“…Several international studies have also assessed the interplay of CG and VC investments. For example, in a study discussed in more detail above, Chahine and Goergen (: 414) look at the interplay of CG and VC power, and argue that “the decision to go public and in particular the pricing of the IPO are the result of the balance of power within the IPO firm, and more specifically within its boardroom.” Chen, Liao, and Lu () study the effects of public VC (PVC) investments on CG related factors such as the extent of EM, independence of the Board of Directors and the influence of controlling shareholders. They find that PVC backed firms exhibit less EM, have fewer control‐affiliated directors and better (more independent) board structures than non‐PVC‐backed IPO firms.…”