Venture Capitalist Reputation and the Long-run Performance of China’s Initial Public Offerings Jing Ma Submission for the degree of Doctor of Philosophy in Accounting and Finance Newcastle University Business School March 2019 Abstract China has experienced significant growth in the Initial Public Offering (IPO) market during the last decade. During this period, venture capital (VC) has been playing an increasingly important role in the IPO market. The main aim of this thesis is to empirically examine the impact of both VC-backing and VC reputation on the long-run performance of Chinese IPOs, and to explore whether the impact is subject to where the IPO get listed, e.g. ChiNext Board (a Nasdaq-type Board in China). The thesis measures IPO performance with both share price performance and operating performance. In particular, the former is measured as the buy-and-hold abnormal returns, where the each IPO has its own matched portfolio as the benchmark. The latter is measured by the return on equity. These measures are calculated for up to three years post IPO. Significantly, this thesis acknowledges the wide range of possible metrics that can be used for measuring reputation and examines the importance of metric choice on the performance measurement outcomes. A special feature of the reputation used in this thesis is the use of a real-world and market-based ranking measure for VC reputation created by the Zero2IPO Research Group for the China market, which is more multifaceted than many of the traditional proxies for reputation used in earlier studies. This thesis constructs a cross- sectional sample consists of more than 1000 IPOs listed during the nine-year period from January 2004 through December 2012. The thesis finds that although IPOs generally experience long-run underperformance in the Chinese stock market, VC-backed IPOs show better long-run performance than their non- VC-backed counterparts. In addition, there is some evidence that the higher the VC’s reputation, the better their invested IPOs perform in the stock market relative to non-VC- backed IPOs. This pattern is driven primarily by IPOs listed on the ChiNext Board (a Nasdaq-type Board), and the results are independent of reputation proxy. However, within the sample of VC-backed IPOs, the difference in performance between IPOs backed by high- reputation VCs and those backed by lower-ranked VCs is found not to be statistically significant and so this study is unable to provide conclusive evidence that VC reputation influences the performance of VC-backed IPOs. In the case of operating performance, neither VC-backing nor VC reputation affect post-IPO performance significantly. This is likely due to the limited forward-looking characteristics of historic accounting data, especially for early- stage and hi-tech firms. These results are robust to a range of additional tests. The thesis brings forward some important policy implications based on the results. For example, the government should broaden the sources of funding to make private VC to participate more into the IPO market, provide more favourable tax policies to VC and encourage more involvements from VCs. I Acknowledgement I would like to express my immeasurable appreciation and deepest gratitude to my supervisors Professor Simon Hussain and Dr. Chen Su for their continuous supports, professional guidance, and valuable supervisions throughout this period. I am so blessed to have them as my supervisors. My PhD study would not have been possible without their generous help, untiring patience, and inspiring encouragement. They give me the faith to overcome difficulties and the confidence to continue. As my supervisors, they have taught me more than I could ever give them credit for here. They have shown me, by their own examples, what good academics should be. I am deeply indebted to the exceptional supports, care, and love from my parents. The financial supports, encouragement, and understanding they offered have made it possible for me to complete my study overseas. I especially would like to deliver my deepest thanks to my aunt and my grandmother, for their continuous and selfless love throughout my life. You all are so important to me. Finally, I would also like to acknowledge all the colleagues and friends for their kindly help, emotional supports, and inspiring comments. All these make my PhD journey interesting, challenging and rewarding. II List of Figures 1.1 Distribution of A share IPOs ……………….……………………………….................2 1.2 Distribution of VC Quantity and the Gross capital Raised ……………………………6 4.1 Operating Performance of IPOs ….............................................................................110 4.2 Operating Performance of IPOs by Year… ...............................................................111 4.3 Operating Performance of VC-backed and Non-VC-backed IPOs.............................116 III List of Tables 1.1 IPO Frequency and Market Capitalization of ChiNext …………………………… 4 3.1 Distribution of IPOs from 2004 to 2012 ……………………………..……..............53 3.2 Industry Classification by ICB ……………………………………………...……... 54 3.3 Distribution of IPOs by Boards, Industry, and Ownership ………………..……......55 3.4 VC Ranking Standards across 2004 to 2012 …………………………………......…61 3.5 Lead VC Reputation ……………………………………..……………….………... 65 3.6 Lead VC Reputation Correlation Matrix ………………………………….……….. 66 3.7 High and Low Reputation ……………………………………………………….… 68 3.8 Descriptive of IPO Characteristics ……………………...……………. ……………74 3.9 A Summary of Variables ………………………………………………...………….75 4.1 BHARs of IPOs from 2004 to 2012 ………………………………………..….….. 83 4.2 BHARs between VC-backed and Non-VC-backed IPOs………………………...… 85 4.3 Impacts of VC on Long-run Stock Market Performance………………………….. 87 4.4 VC Reputation and BHAR36 VC-backed IPOs . ………………………...………... 90 4.5 VC Reputation and BHAR36 on Full Sample ………………………………........... 92 4.6 Top-20 VCs and BHAR36 ………………………………………………...……..…. 96 4.7 Top-50 VCs and BHAR36 ……………………………………………...…………... 97 4.8 VC Ranking and Alternative BHARs ………………………………….….……... 99 4.9 Alternative Lead VCs and BHAR36 ……………………………….…….………...100 4.10 Alternative Reputation Measurements and BHAR36 ……………………...……...102 4.11 VC Ranking and BHAR36 by Boards ……………………..…………….…......…104 4.12 Alternative Reputation Measurements and BHAR36 by Boards……….......…. ….106 4.13 ROEs of IPOs from 2007 to 2012……………………….………………….….....109 4.14 Changes of ROEs…………………………………………..………………….. .. 112 4.15 Changes of ROE1 of VC-backed and Non-VC-backed IPOs……………………. 114 4.16 Changes of ROE2 of VC-backed and Non-VC-backed IPOs ………...……….. .. 115 IV 4.17 Impacts of VC on Long-run Operating Performance ……………..………..…….119 4.18 VC Reputation and ROE1 of VC-backed IPOs ……………….……………….....121 4.19 VC Reputation and ROE1 on Full Sample IPOs ……………………...………….122 4.20 VC Ranking and Operating performance ………………………….…………... ..124 4.21 Alternative Reputation Measurements and ROE1 ………………………………..126 4.22 Alternative Reputation Measurements and ROE2 ………………………………..127 4.23 VC Ranking and Operating Performance by Boards……………………………..131 4.24 Alternative Reputation Measurements and ROE1 by Boards…………………..... 132 4.25 Alternative Reputation Measurements and ROE2 by Boards …………...……......133 5.1 Heckman 2-step on Impacts of VC………………………………………………...140 5.2 Heckman 2-step on Impacts of VC Reputation on VC-backed IPOs………………142 5.3 Heckman 2-step on Impacts of VC Reputation on Full Sample…………………...143 5.4 VC Ranking and BHAR36…………………………………………………......... ...145 5.5 VC Ranking and BHAR36 by Boards………………………………………………147 5.6 Characteristics of VCs ……………………………………………...……………...154 5.7 Characteristics of Top-20 and Non-Top-20 VCs …………….…………..………..155 5.8 Characteristics of Top-50 and Non-Top-50 VCs ……………..……….…...……...156 5.9 Correlation matrix of VC Reputation Measurements ……………………………...158 5.10 Associations between Top-20 and the Other Reputation Measurements…........ ...161 5.11 Associations between Top-50 and the Other Reputation Measurements...….……162 V List of Abbreviation BHAR Buy-and-Hold Abnormal Returns CAR Cumulative Abnormal Returns CSMAR The China Stock Market & Accounting Research CSRC China Securities Regulatory Commissions ICB Industry Classification Benchmark IPO Initial Public Offering M&A Merge and Acquisition PE Private Equity Repo Repurchase Agreements ROA Return on Assets ROE Return on Equity SHSE Shanghai Stock Exchange SME Small and Medium Sized Enterprises SZSE Shenzhen Stock Exchange VC Venture Capital VI Contents Abstract I Acknowledgement II List of Figures III List of Tables IV List of Abbreviations VI 1 Introduction 1 1.1 IPO Market in China .................................................................................................. 1 1.2 The ChiNext Board .................................................................................................... 3 1.3 VC Industry in China ................................................................................................. 5 1.4 VC Reputation ........................................................................................................... 7 1.5 Research Questions and Hupothesis .......................................................................... 8 1.6 Research Contributions .............................................................................................. 9 1.7 Research Finding ..................................................................................................... 10 1.8 Thesis Structure ......................................................................................................