AN EMPIRICAL ANALYSIS OF VENTURE CAPITAL CERTIFICATION AND FINANCIAL STABILITY IN CHINA’S IPO MARKET

Abstract

his study examines the certifying role of venture capital (VC) in reducing financial distress and lowering the cost of capital for Chinese initial public offerings (IPOs). Using a dataset of 1,683 non-financial firms that went public between 2006 and 2016, the analysis reveals that VC-backed firms experience significantly lower financial distress and benefit from more favorable financing conditions compared to non-VC-backed firms. To address potential endogeneity, the study employs propensity score matching, confirming that VCs play a critical role in selecting firms with strong growth prospects, characterized by reduced financial risk and improved cost efficiency. Furthermore, firms supported by reputable VCs exhibit markedly lower financial distress and achieve greater reductions in financing costs. The findings also suggest that independent private venture capital firms exert a particularly strong influence in mitigating financial costs for IPO firms. Overall, the results highlight the dual impact of VC backing: alleviating financial distress while providing a certification effect that substantially reduces the cost of capital for supported firms.