The Role of Governmental Venture Capital in Value Creation for Investee Firms : Evidence from Chinese Government Guidance Funds

We study the role of Chinese government guidance funds (GGFs) in value creation for investee firms. Using a sample of 2,855 firms that went public during the period of 2010-2021, we show that GGF-backed IPO firms had higher initial returns than non-VC-backed IPO firms and non-GGF VC-backed IPO firms. After decomposing the initial return into IPO underpricing and market overvaluation, we find that GGF-backed firms enjoyed higher overvaluation and lower underpricing than other firms. Consistent with investor sentiment and information asymmetry hypothesis, our results indicate that public investors value the benefits of political resources more than the costs of government interference associated with GGF sponsoring. However, GGF-backed firms did not outperform other-VC-backed firms when post-IPO long-term stock, operating and innovation performance is assessed. The divergence in the effects of GGFs observed in the financial and product markets reveals the complexity in evaluating the role of GGFs in value creation