Certification,Monitoring or Market Power?Effects of VC on IPO underpricing in China GEM

In the past twenty years,venture capitals( VC) have played quite important role in the growth of small and medium enterprises,and drawn the academic circles attention. How does VC influence the IPO underpricing of the enterprise's stocks? That is a controversial issue,which has no final conclusion. The classical Certification Hypothesis and Monitoring Hypothesis argue that VC can decrease the information asymmetry between the enterprises and the outside investors,reducing the IPO underpricing. This hypothesis is supported by conclusions of quite many researches,while there are still a lot of conclusions against it. There are two theoretical hypothesis challenging the classical hypothesis,arguing that IPO underpricing of VC-backed companies should be larger than peers. The Grandstanding Hypothesis holds that the less skilled VC will push the enterprise go public earlier than it should be,enlarging the IPO underpricing. The Market Power Hypothesis considers that VC can raise the stock's secondary market price,enlarging the IPO underpricing.In this paper,we utilize a sample of 259 companies,investigate the role of venture capital in the IPO underpricing in Chinese Growth Enterprises Market,and gains several interesting conclusions different from previous studies. We find that the offering price is of no significant difference between VC-backed firms and Non VC-backed firms,while VC-backed firms can still have higher closing price of the first trading day and higher underpricing. This implies that the market power hypothesis rather than the certification hypothesis or the screening and monitoring hypothesis is supported. Our further research indicates that the share proportion and control rights of venture capitals on the firm are positively associated with the market power effect. The first part of this paper points out that there are two assumptions beneath the classical hypothesis,enough market efficiency so that the first day closing price can reflect the stock's intrinsic price,and the stock ‘s issuing price reflecting VC's role. We create a variable named as Relative P / E ratio( RPE) to compare the issuing pricing of VC- and non VC-backed companies,and find that VC ‘s participation has no significant influence on stocks' issuing pricing. In the second part of this paper,we build an econometrical model and investigate whether VC can increase the first day closing price and the IPO underpricing. The conclusion is that although VCs cannot raise the issuing price,but they can raise the first day closing price,and the IPO underpricing,which indicates the Market Power Hypothesis holds. The third part further investigates how VC influence the IPO underpricing. The results reveal that the market power of VC is significantly positive related with VC's proportion of shares and boards of directors. This conclusion indicates investors in the secondary market do care about the degree that VC can exert influence on the company. The last part of this paper put forward suggestions of policy that the supervisors should guide the market power of VC to rationally lessen the information asymmetry,and improve the pricing efficiency.