The impact of venture capital subscription on price deviation of private placement: evidence from China

• Date: 06 November 2024
• Pages: 104-143
• DOI: https://doi.org/10.1108/IJAIM-05-2024-0165
• Published date: 06 November 2024
• Author: Jingyi Guan,Xueying Wen,Yunhui Wen

The impact of venture capital

subscription on price deviation of

private placement: evidence

from China

Jingyi Guan

School of Intelligent Finance and Accounting Management,

Guangdong University of Finance and Economics, Guangzhou, China

Xueying Wen

School of Accounting, Guangzhou Xinhua University, Dongguan, China and

School of Accounting, Guangdong University of Finance and Economics,

Guangzhou, China, and

Yunhui Wen

School of Accounting, Guangdong University of Finance and Economics,

Guangzhou, China

Abstract

Purpose –The purpose of this study is to examine the role of venture capital(VC) in supporting corporate

growth and innovation through participation in private placements. While VC provides essential f‌inancial

support to companies, it remains unclear whether this involvement serves a strategic investment role or a

purely f‌inancial one.This study seeks to elucidate the role of VC by analyzing changes in the price discount of

private placementsfollowing VC participation.

Design/methodology/approach –The authors take the private placement events of China A share listed

companies from April 2005 to January 2023 as the sample, and examine the inf‌luence of VC subscriptions on price

discount rate.

Findings –VC subscriptions to private placements increase information asymmetry, consequently raising the

discount rate. This relationship is inf‌luenced by the transaction characteristics and information environment.

Specif‌ically, VC subscriptions further elevate the discount rate when VC are geographically dispersed from the

issuers, possess industry expertise in the issuers’sector, allocate raised funds for asset restructuring or non-digital

investments and when the issuers are in their growth stages. Moreover, the positive correlation between VC

subscriptions and the discount rate is more pronounced under conditions of lower internal control quality andweaker

external media supervision. Higher discount rates in VC-subscribed private placements result in lower R&D

investment and investment eff‌iciencyby the issuers, leading to larger-scale VC sell-offs and ultimately diminishing

the market and f‌inancial performance of the issuers.

Practical implications –The issuers should diligently assess the behaviors and motives of VC and

selectively choose issuance targets and methods to manage risks associated with price deviations in private

placements. Additionally, this study recommends that regulatory authorities develop a more detailed

The authors would like to express their sincere gratitude to the reviewers and the editor for their

insightful comments and constructive suggestions.

Conf‌lict of interest statement: The authors declare no conf‌licts of interest.

Funding statement: This work was supported by the National Natural Science Foundation of China

under Grant 72002040; the Humanities and Social Science Fund of Ministry of Education of China

under Grant 24YJC630054; the General Colleges and Universities Featured Innovation Project of

Guangdong Province under Grant 2024WTSCX160.

IJAIM

33,1

104

Received18 May 2024

Revised3 A ugust2024

4 September 2024

Accepted14 October 2024

InternationalJournal of

Accounting& Information

Management

Vol.33 No. 1, 2025

pp. 104-143

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-05-2024-0165

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

regulatoryframework that considers transaction characteristicsand the information environment.This strategy

should help optimize external regulatorymeasures like media coverage and protect the interests of small and

medium-sizedinvestors.

Originality/value –This study extends researchon the “name chasing”motive and certif‌ication effect of VC

in private placements, enrichesthe literature on the mechanisms forming discount rates and provides insights

for ref‌ining regulatorypolicies on private placements.

Keywords Venturecapital, Private placement, Price deviation, Discount rate,

Information asymmetry, Economic consequence

Paper type Research paper

1. Introduction

In modern investment theory, investors are often assumed to be rational agents whose

behavior adheres to the principle of maximizing individual utility (Persky, 1995). However,

market practices indicate that the rationality assumption does not fully account for investor

behavior, particularly in the Venture capital (VC) and private placement markets. The

Chinese private placement market, inparticular, has attracted signif‌icant attention due to its

pronounced discount phenomena, which persist despite ongoing regulatory improvements.

This situation not only challenges market eff‌iciency theories but also raises new questions

about the motives of the VC.

Much research has focused on VC investments in startups, with the prevailing academic view

suggesting that VC plays a positive role in companies. Although some scholars have observed that

VCs use their informational advantages to guide market pricing and choose optimal exit timing,

often driven by the motive of maximizing institutional interests (Cohen and Kudryavtsev, 2012),

the dominant academic perspective views VC as performing oversight and signaling roles.

According to the oversight certif‌ication theory, VCs have a strong incentive to monitor and

manage their investments (Kaplan and Strömberg, 2001). Studies have shown that companies

with VC backing exhibit stronger oversight capabilities during initial public offerings (IPOs)

compared to those without (Campbell and Frye, 2009). VCs actively monitor management

decisions to prevent value decline and restrain the misconduct of major shareholders. Meanwhile,

the signaling mechanism posits that VC involvement serves as a positive signal, reducing IPO

underpricing (Hellmann and Puri, 2002;Megginson and Weiss, 1991). In this research context,

when VCs are more inclined toward intrinsic rather than extrinsic motivations, they are likely to

exhibit managerial rather than purely prof‌it-oriented behaviors (Davis et al., 1997).

In contrast, traditional economicviewpoints suggest that investors subscribing to private

placements primarily seek short-term returns, such as those derived from discount rates

(Cohen and Kudryavtsev, 2012). The level of discount not only affects investors’short-term

returns but also ref‌lects market expectations about a company’s future performance

(Manigart and Meuleman,2004). Despite these insights, the applicability of these viewpoints

to VC subscriptions of privateplacements remains underexplored.

In capital markets, the impact of VC subscriptions on the discount rate of private

placements largely dependson the presence of information asymmetry.From the perspective

of information asymmetry, a primary risk associated with VC subscriptions may arise from

the information gap between the issuingf‌irm and the VC. The issuing f‌irm possesses detailed

internal information about the company, while the VC relies on external information. High

levels of external information asymmetry can signify greater risk, with increased external

risks being associated with higher VC ownership, greater VC control and more contingent

compensation (Kaplan and Strömberg, 2004). To mitigate future earnings uncertainty and

enhance the “safety cushion”of returns,VC subscriptions are more likely to result in a “high

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discount”phenomenon when external information asymmetry is high. Information

asymmetry is also ref‌lected in the qualityof internal controls and external media oversight of

the f‌inancing party, resulting in insuff‌icient information disclosure and further exacerbating

information asymmetry. In such circumstances, VC may increase the discount rate to offset

potential losses arising from the lack of information.

It is precisely in this environment of high information asymmetry that the roles of

intellectual capital and social capital become particularly important. Intellectual capital

comprises a set of structural and human capital, including applied business, organizational

technology,customer relationships and professional skills (Salehiet al., 2021;La Torre et al.,

2018;Cenciarelli et al., 2018). Some argue that this asset lacks objective and tangible

properties, categorizing it as an intangibleasset realized through attributes related to human

resources, organizational performance and external organizational relationships (Basso

et al., 2010). The application of intellectual capital plays a crucial role in creating corporate

value and establishing a sustainablecompetitive advantage (Bchini, 2015). Social capital, on

the other hand, is the product of resource aggregation within a durable network of group

relationships. Its value is manifested in the maintenance of social norms and reciprocal

assistance (Vershinina et al., 2011). Social capital functions through investment in social

relationships to gain expected returns (Lin, 2017). Importantly, social capital is not a

unidimensional concept, with different authors focusing on various aspects of it (Wang and

Warn, 2019). Social capital is signif‌icant for enterprises as it facilitates the development of

intellectual capital by “inf‌luencingthe conditions necessary for exchange and combination”

(Nahapiet and Ghoshal, 1998). A signif‌icantpositive relationship exists between intellectual

capital and social capital (Salehi et al., 2022). Therefore, our study aims to further explore

the impact of VC subscriptions on the discountrates of private placements, particularly from

the perspectives of social capitaland intellectual capital.

By viewing VC subscriptionsto private placements as an exchange process of intellectual

and social capital between VCs and the companies issuing the private placements, we can

gain a deeper understanding of this dynamic. During the negotiation of the discount rate for

private placements, VCs weigh the investment value of the f‌inancing projects against the

discount rate. If the f‌inancing projects include valuable intellectual capital (such as digital

projects), VCs may make concessions on the discount rate. However, it is more likely that

VCs will leverage their human capital advantages(industry expertise) to negotiate the lowest

possible issuance price. Additionally, some social capital may become negligible as

geographical distance increases, potentially reaching a breaking point (Light, 2004).

Financing parties located fartheraway may incur higher transaction costs to acquire specif‌ic

capital. Besides the economiccapital raised through private placements, the f‌inancing parties

may seek to acquire corresponding capital (social and intellectual capital) through VC

subscriptions. This need is particularly acute during growth phases or periods of asset

restructuring.

VC typically invests in privatecompanies over the long term, whereas the lock-up period

for subscribing to private placements is only six months, relatively short. This temporal

disparity implies differences in operational management motivations between the two. In

long-term investments, VC generally focus more on long-term value appreciation and

corporate growth, potentiallyengaging more actively in strategic planning and management

decisions to foster enterprise development. In contrast, short-term investments may

emphasize immediate prof‌it, focusing on short-term stock price f‌luctuations and capital

returns. Thus, from a temporal perspective, long-term and short-term investments could

differ in their operational management motivations for enterprises. The impact of VC on

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