Private Equity Characteristics, Corporate Governance and Firm Value: Empirical Evidence from Small and Medium‐sized Enterprises*

• Author: Shao Qiang,Rakesh Gupta,Li Haihong,Li Jiujin
• DOI: http://doi.org/10.1111/asej.12207
• Published date: 01 June 2020
• Date: 01 June 2020

Private Equity Characteristics, Corporate

Governance and Firm Value: Empirical Evidence

from Small and Medium-sized Enterprises*

Li Jiujin, Rakesh Gupta, Li Haihong and Shao Qiang

Received 1 December 2018; Accepted 15 December 2018

To extend existing research, this study examines whether private equity (PE) and

corporate governance affect firm value using empirical data on the small and

medium-sized boards of listed initial public offering companies in China. The

empirical results show that PE investment can raise firm value as well as affect

management behavior at the macro level. At the micro level, the greater PE firms’

shareholding, the higher is firm value, which is positively influenced by the time

the PE stake has been held. PE reputation and foreign PE are also positively

related to firm value. Finally, corporate governance plays a partial mediating role

in the relationship between PE investment and firm value.

Keywords: private equity, Chinese SME, corporate governance, firm value.

JEL classification codes: G3: Corporate Finance and Governance.

doi: 10.1111/asej.12207

I. Introduction

Private equity (PE) investment refers to raising funds for project investment

through a non-public offer with the potential to obtain a higher share price. The

birth of PE investment in China can be traced to 1992, when it was initially guided

by government investment funds and used to improve the technological innovation

capabilities of high-technology enterprises. Over the past three decades , China’s

PE has flourished because of three main aspects: (i) the rapid development of

online enterprises; (ii) the structural transformation of China’s economy with the

development of emerging industries and small and medium-sized enterprises

*Jiujin (corresponding author): School of Economics and Management, Northeast Petroleum Uni-

versity, Daqing 163318, China. Email: dqlijiujin@126.com; School of Economics and Management,

Harbin Institute of Technology, Harbin, China. Gupta: Griffith Business School, Griffith University,

Mount Gravatt, Queensland, Australia, Banking University of Ho Chi Minh City, Vietnam and Sri

Sri University, Cuttack, India. Haihong, Qiang: School of Economics and Management, Northeast

Petroleum University, Daqing 163318, China. We thank the National Natural Science Foundation

Project of China (71390521) and the Postdoctoral Foundation of China (2018M630381,

LBH-Z17195) for financial support.

© 2020 East Asian Economic Association and John Wiley & Sons Australia, Ltd

Asian Economic Journal 2020, Vol.34 No. 2, 163–183 163

(SME); and (iii) traditional enterprises’need for financial innovation in line with

developing market trends.

Using data on IPO-listed domestic companies in 2008–2012, we examine the

effect of PE investment on corporate governance and firm value from the per-

spective of financing constraints. In particular, previous studies have ignored the

mediating effect of corporate governance and the influence of the characteristics

of PE investment on firm performance and, thus, firm value. By specifically

addressing the characteristics of PE investment and firm value, our research con-

tributes in four main ways.

First, the characteristics of PE investment are introduced to explore their influ-

ence on firm value. Therefore, our findings have implications for managers seek-

ing to introduce PE into their capital structure. Second, we analyze the impact

of PE characteristics on corporate governance and show that PE investment

improves corporate governance and strengthens the supervision of the invested

firm. Third, we find that corporate governance is positively related to firm value,

indicating that improving corporate governance enhances the value of the

invested firm. Fourth, corporate governance plays a partial mediating role in the

positive correlation between PE investment and firm value.

The rest of this paper is organized as follows. Section II develops the hypoth-

eses and Section III outlines the research design. Section IV presents the model

and Section V discusses the empirical results. Robustness checks are performed

in Section VI. Section VII concludes and provides the implications of our

findings.

II. Hypothesis development

Previous findings on the relationship between PE investment and firm value are

mixed. Most studies find a positive relationship between these two factors, espe-

cially in developed countries. These findings support the three specific functions

of PE investment. First, PE investment provides a ‘screening function’

(Megginson and Weiss, 1991) that results in better performance for firms with

PE investment. Tang and Yi (2008) focus on companies listed on the growth

firm board in Hong Kong and show that firms providing an equity contribution

improve firm value after an initial public offering (IPO). The performance of

these companies is significantly better than that of those without the participa-

tion of risk investment firms,

1

indicating that risk investment has a positive

influence on firm performance after an IPO.

Second, Megginson and Weiss (1991), using a sample of 670 listed compa-

nies, find that the listing cost of companies can be reduced with PE investment.

In addition, PE investment firms continue to monitor the invested firm after the

IPO. Yu and Xiang (2013) analyze the performance of GEM companies before,

1

Tong and Tan (2008) used risk investment similar to how we use PE investment.

ASIAN ECONOMIC JOURNAL 164