Monitoring or colluding: the role of venture capital investors in the IPO process

We argue and provide evidence that instead of playing a monitoring role, venture capital (VC) investors collude with controlling shareholders in the IPO process of Chinese non-state-owned enterprises (non-SOEs). We show that VC-backed IPOs’ applications are more likely to be approved by regulators, especially in firms with excess control rights, but have worse post-IPO performance. Through investing in firms with excess control rights, VC investors are able to make higher exit returns. We further document that VC investors’ role in the IPO process is stronger when they have political connections, hold higher ownership, and when they make pre-IPO investment.