Venture capital certification and financial stability: An empirical study of Chinese IPOs

Abstract

This study examines the certification role of venture capital (VC) in reducing financial distress and the cost of capital among Chinese initial public offerings (IPOs). Using a panel dataset of 1,683 non-financial firms listed on Chinese exchanges between 2006 and 2016, we find that VC-backed firms exhibit significantly lower financial distress, as measured by the Altman Z-score and Zmijewski score, and lower financing costs relative to non-VC-backed counterparts. To address potential selection bias arising from non-random VC targeting, we apply propensity score matching (PSM) using nearest-neighbor and kernel methods. Post-matching estimates confirm that the observed differences are not solely attributable to the preferential selection of financially robust firms. Further analysis reveals that firms backed by reputable VCs benefit from substantially greater reductions in both financial distress and financing costs, consistent with a heightened certification effect. Among VC organizational types, independent private venture capital firms uniquely and significantly reduce IPO firms' financial costs, while government-affiliated and corporate-affiliated VCs are associated with higher financial costs. These findings underscore the importance of VC backing, its reputation, and its organizational form as determinants of capital market certification and financial outcomes in an emerging market setting.