Money Chasing Hot Industries? Investor Attention and Valuation of Venture Capital Backed Firms, a paper co-authored by our school’s Professor Zhang Yueyong, and PhD student Que Jiangjing (who is also a young teacher at Beijing Technology and Business University), was officially accepted by Journal of Corporate Finance, a prestigious international academic journal.
This paper probes into the effect of investor attention on the valuation of venture capital (VC) backed enterprises. Using the Baidu Index, the authors construct a direct measure of investor attention to industries (ASVI). The results show that an increase in ASVI predicts higher firm valuations. This paper further proves that a rise in the valuation of VC backed firms is an attention-induced result, rather than an information-based fundamental premium.
This paper provides support for the attention hypothesis with three empirical results: (1) There is a long-run reversal of the valuations of VC backed firms; (2) The performance of VC investments is inversely proportional to investor attention. That is to say, higher investor attention leads to worse performance of VC investments; (3) Syndicated investments and involvement of experienced VCs may reduce the effect of investor attention on enterprise valuations. The conclusion reached herein indicates that there is a tradeoff between investor attention and the valuation that VCs can get. High attention can push up firm prices, however, as a tradeoff, the performance of both successful exits and exit return multiples is worse. Meanwhile, overpricing driven by investor attention can be attenuated through some adjustments of investment strategies. These strategies make venture capitalists less vulnerable to investor sentiment and reduce the overpricing, which facilitates future performance of VC funds and subsequently their ability to raise future funds.
Our study contributes in the following two aspects: Firstly, traditional approaches to measuring the valuation of VC backed firms mainly focus on endogenous factors, such as the characteristics of startups and VC investments. But we introduce a third-party factor - investor attention. Secondly, studies about the effect of investor sentiment on asset pricing are mainly concentrated on secondary markets and IPO valuations, but previous research has not touched upon the impact of investor sentiment on enterprise valuations in the venture capital market. Our study fills in the gap.
