The Effects of Venture Capitalists on the Governance of Firms

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: What determines venture capitalists influence on the governance of firms? How do venture capitalists shape the governance of their investees? Are venture capitalists governance practices consistent across countries? These important questions are under-investigated in the extant literature. In this study, we shed light on the effects of venture capital investors on a large set of governance decisions and we discover the existence of striking cross-country differences. Research Findings/Insights: We test our conjectures on a unique hand-collected questionnaire-based dataset of 164 companies in five countries and two regions (Europe and the US). Our empirical results show that there is a strong and positive relationship between VCs' funding and their influence on some factors like decisions on CEO hiring, executive compensation, board decisions and appointments. Employee incentives are also positively related to the proportion of VC funding. On the other hand, results show that the proportion of VC funding is only marginally significant in explaining VC influence on strategy direction and investment planning. Our analysis though, offers a remarkably different view after splitting data into European and American subsamples. Theoretical/Academic Implications: Our results provide a novel view of the functioning of the Venture Capital industry and its degree of pervasiveness in the management of portfolio companies. Adopting a unique dataset, we add new evidence on detailed governance decisions, thus supporting the idea that the incremental contribution of a professional investor to a new venture is largely exceeding the capital infusion only. Finally, we show that governance decisions exhibit significant country effects. This evidence supports the view that a global theory of corporate governance cannot rely on a single interpretation framework such as agency theory, but needs to be integrated with predictions from alternative views such institutional theory. Practitioner/Policy Implications: Corporate governance is the essential mechanism allowing proper management of financial and corporate resources by aligning incentives of employees and investors, thus enabling oversight and control on companies. Yet, corporate governance rules and mechanisms are costly and have different effectiveness across countries. Our results provide guidance to investors in selecting the appropriate set of governance provisions conditional on a set of investment-specific factors.

Governance, Ownership Structure, and Performance of Entrepreneurial IPOs in AIM Companies

“…We find that there is a significant and positive relationship between CG characteristics (measured by CGAIM50 index) and VC ownership; this finding is consistent with the findings of earlier studies (Bonini et al, ; Filatotchev et al, ), and emphasizes the monitoring role of VCs in developing the corporate governance characteristics of the firm. Secondly, we find a causal relationship between corporate governance (CG) and financial performance (FP).…”

“…Other studies have been supportive of this trend for more effective governance, for example, VC‐backed IPOs have more independent boards than non‐VC‐backed IPOs (Filatotchev et al, ; Suchard, ); the influence of VCs on hiring of CEOs, executive remuneration, board decisions and appointments (Bonini et al, ); and the VC monitoring role (Chahine & Saade, ). Campbell and Frye () studied the impact of VC involvement on governance structures at IPO and four years post‐IPO.…”

“…There is also a strong and positive relationship between the funding by European VCs and their influence on governance measures but even more so for US VCs on executive compensation and board appointments. This would suggest that institutional theory is playing a part (Bonini et al, ).…”

“…The influence of ownership structure and, in particular, of venture capital funds on the corporate governance and performance of initial public offerings (IPOs) has been the focus of a number of studies (Bonini, Alkan, & Salvi, ; Bruton, Filatotchev, Chahine, & Wright, ; Filatotchev, Wright, & Arberk, ; Suchard, ). The role of venture capital funds in promoting better, more effective governance and hence enabling high growth in entrepreneurial companies is particularly important at a time when stock markets are still recovering from the financial crisis, and when investors may be more reluctant to invest in entrepreneurial companies' IPOs (often seen as more risky).…”

Has Agency Theory Run its Course?: Making the Theory more Flexible to Inform the Management of Reward Systems

“…Berrone and Gomez‐Mejia (); Bonini, Alkan, and Salvi (); Bruton, Filatotchev, Chahine, and Wright (); Capezio, Shields, and O'Donnell (); Chung and Luo (); Fernandez‐Alles, Cuevas‐Rodriguez, and Valle‐Cabrera (); Filatotchev and Wright (); Johanson and Østergren (); Kang and Yanadori (); Lawrence and Fogarty (); Lin and Chuang (); Nicholson, Kiel, and Kiel‐Chisholm (); Nwabueze and Mileski (); Renders and Gaeremynck, (); Shi, Magnan, and Kim (); Singh and Gaur (); Young, Stedham, and Beekun ()…”