Venture Capital, Patent Growth, and the Long-run Performance of IPO Stocks, a paper co-authored by PhD student Zhang Yeqing from the Department of Finance of Tsinghua University School of Economics and Management, and our school’s Professor Zhang Xueyong, was officially accepted by International Review of Economics and Finance, a prestigious journal on finance.
This paper looks into the effect of patent growth of VC-backed IPO companies on their long-term performance. Previous studies show that the long-term market performance of VC-backed IPO companies is apparently better than other companies. As an important means of financing for startups, venture capital (VC) can effectively help them build innovation capabilities, which can translate into long-term competitiveness and profitability. Enterprises with strong innovation capabilities usually deliver better long-term performance after they go public. Therefore, starting with innovation capability, this paper discusses the channels by which VC boosts the performance of invested companies.
China’s VC industry has witnessed rapid development in recent years, and also attracted a large number of VC institutions abroad. But different from other developed economies, China faces a more complex economic environment and unique system background, with greater information asymmetry in its stock market. So, studies on China’s VC market, esp. on channels by which VC boosts the performance of invested companies are very essential. This paper attempts to make academic contributions in this research area.
It compares and analyzes three groups of companies based on the samples of listed companies in China’s A-share market in 2003-2013: VC-backed companies with patent numbers growing, VC-backed companies without patent growth, and non-VC-backed companies. The authors find that the long-term excess returns of the first group were far higher than the second group; as a control group, the long-term performance of the third group was not notably different from the second group. The result shows that during the investment period, VC helped enterprises achieve technological innovation, which allowed them to deliver better long-term performance after listing; conversely, enterprises without innovation capabilities only delivered lackluster performance. This conclusion continues to hold under a number of robustness tests.
The paper provides a new way to explain why VC-backed enterprises can deliver superior long-term performance. That is because venture capital, during the investment period, helps enterprises carry out R&D innovations and successfully apply for patents so that they can win market recognition more easily in the long run. In other words, technological innovation is key to improving competitiveness and performance of VC-backed enterprises.
Zhang Yeqing, a co-author of the paper, was a bachelor of finance who graduated from our school in 2015, and enrolled in our school’s second outstanding academic talent program for bachelors.
