IPO Suspensions and Venture Capital Activity

Abstract

The potential to exit companies through Initial Public Offerings (IPOs) is argued to be critical to the existence of an active venture capital (VC) market. However, this can be difficult to test due to endogeneity concerns. We use the suspension of China’s IPO market as an exogenous shock. We analyse the impact of IPO suspensions on VC investment, exit mechanisms and fundraising. We find that contemporaneous VC investment decreases. VCs are more likely to invest in high tech and less likely to invest in late stage and syndicated deals. Companies that received investment during an IPO suspension are less likely to be exited and take longer to exit. IPO suspensions significantly increase the likelihood of an exit via takeover and international IPO markets. Further, both the number of new funds raising capital and fund target amounts decrease. The results suggest that lack of access to public markets dampens VC activity.