Controlling shareholders, venture capital and expropriation in private placements

Abstract

This paper investigates the expropriation of minority shareholders in private placements (PPs) conducted by Chinese listed companies and explores the monitoring role of venture capitals (VCs) in mitigating the expropriation. Our empirical analysis reveals that controlling shareholders engage in various opportunistic behaviors around PPs to expropriate value from minority shareholders. Furthermore, we find that the involvement of VCs in listed companies significantly reduces these opportunistic behaviors through improving the information disclosure quality and enhancing the board supervision. Additionally, our further analysis indicates that VC's monitoring effect is particularly pronounced in enterprises with non-government background VC, higher reputation VC and VC syndicate. Our findings suggest that informal interactions between VCs and controlling shareholders may complement formal corporate governance structures, thereby offering additional protection for minority shareholders.