New ventures usually pursuits for a high level on financing stability throughout the life cycle of entrepreneurial company from seed to mature stage; nonetheless, theoretical discussions leave this issue out of consideration for long on this challenging research. Economic analysts point out that compiling superior information is the access to conspicuous investment performance in markets with high risk and uncertainty (e.g., Kaplan, Martel, and Stromberg, 2003; Hochberg, Ljungqvist, and Lu, 2007; Cohen, Frazzini and Malloy, 2008; Cohen, Frazzini and Malloy, 2010). Consequently, raising the following question: What are the factors
6 Neher (1999) extends the model in the spirit of Admati and Perry (1991) to stage financing as an approach to determine the optimal investment path.
7 Hart and Moore (1994) point out that human capital takes the form of inalienability. Studied in Hart and Moore (1994), suppose that physical assets, such as cash, properties, equipment, owned by entrepreneur need to be transferred to investors once entrepreneur repudiate the contract . If physical assets are valueless without entrepreneur, then entrepreneur wins the bargaining power in the subsequent investment round. In a sense entrepreneur can “hold-up” investors after receiving financing from them.
8 Debates on elimination of double taxation of dividends have already persisted for decades. (e.g., Litzenberger and Ramaswamy, 1979; Bradford, 1981; Bagwell and Shoven, 1989; Trester, 1998)
9 As Admati and Pfleiderer (1991) defined, investors receive fixed fraction of project’s payout and finance fixed fraction of investment in the future under fixed-fraction contract.
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that enable some entrepreneurs successfully obtain investment flow from venture capitalists even policy makers while others fail? To explore this question, Venkataraman (1997) concludes that cooperative relationships based on integrity and prior experience do help diminishing adverse selection and moral hazard problems intimate with economists; and hence, shows one of the most effective ways for information disseminating in new venture industry.
Following basic ideas suggested by Venkataraman (1997), for example, Shane and Cable (2002) integrate in-depth field interviews and show that social ties actually provide an information dissemination mechanism allowing new entrepreneurial firms without high-capital endowments obtain financing to pursue entrepreneurial opportunities in the creation of global innovation and economic growth. However, Huber and Power (1985) and Golden (1992) indicate that retrospective recall bias10 incurred by field interviews are inevitable pitfalls in various reasons. For instance, attempts to retain socially superior image or their self-esteem, incentive to distort past experiences and even the hindsight bias and so on. Cohen, Frazzini and Malloy (2008) comments that evaluating or verifying social capital designs and mechanisms are the leading concern in information dissemination under market with wide varieties of risk and uncertainty, such as new venture investment business incurred by entrepreneurs and investors; therefore, they provide evidence in showing that network links formed through education give a natural framework to predict the flow of private information into stocks between portfolio managers and firm senior officers. Stam, Arzlanian and Elfring (2014) employ meta-analysis11 to synthesize longitudinal research social capital results.
Consequently, once again enhance comprehension of the adding value of cultivating social capital for small firms and reveal that multiple networking strategies are required at different points in time and in different industries and countries.
On the other hand, reputation and its effect on facilitating the information dissemination to reveal the true qualities of entrepreneurship12 is also a pivotal topic in recent economic and corporate finance studies. Process of reputation accumulation builds up relationships of credibility with a wider variety of sources and defines a corporate’s identity in its competitiveness and capacity. For this reason, reputation research has been theoretically and practically discussed in wide economics and market organization fields in the long run. (Kreps and Wilson, 1982;
10 See some classical examples in Stott (1958).
11 Hunter and Schmidt (2004) comment that the use of meta-analytic method helps in clarifying and making sense of the research literature. It not only demonstrates the cumulative knowledge that is there but provides more specific directions about what the remaining research needs are.
12 Venkataraman (1997) defines entrepreneurship as a talent in discovering, creating, and exploiting entrepreneurial opportunities while others cannot or do not.
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Shapiro, 1983; Allen, 1984; Yoon, Guffey and Kijewski, 1993) Concepts of venture capital reputation in past studies have shown up in diversity, such as age, Initial Public Offerings (IPO) market share, and number of investment rounds (Megginson and Weiss, 1991; Gompers, 1995; Gompers, 1996; Gompers and Lerner, 2005;
Nahata, 2008; Krishnan, Ivanov, Masulis and Singh, 2011). Not only venture industry highlight the great importance of reputation on understanding the implicit and explicit contracts, previous studies also provide evidence that other industries matters. In this study, however, it aims to bridge information dissemination between venture capitalists and new entrepreneurial firms by examining the roles of directors’
and supervisors’ networking building.
So far, theoretical or empirical studies have addressed abundant information dissemination issues using reputation mechanism. Compared to reputation, less empirical work is done by social capital mechanism in venture capital issues, especially in political network connection field. One of the main reasons for economists suffer setbacks in government research is the frustrating data access from sources. Ex-ante, one may have believed that political-connected firms are subject to better scrutiny structure and governance; therefore, political connections would, in fact, be associated with better firm performance and quality. However, this is not the case at all. Previous studies in public choice literature discover that government interference in business activities makes economy more severe under weak financial and legal institution constraints while political connection may benefit the society. (Shleifer and Vishny, 1994; Fan, Wong and Zhang, 2007; Li et al., 2008; Woods, 2009) In market-oriented economies, choices even may have been driven by political considerations or rent seeking activities, taking forms such as bribery, corruption, campaign finance, smuggling, and black markets (Krueger, 1974;
Venkataraman, 1997; Faccio, 2006; Fan, Wong and Zhang, 2007).
Cross-country and country-specific event studies show that presence of political connections indeed affect economic outcomes; therefore, entrepreneurs usually have high incentives to build networks with politicians or governments.
Beck and Levine (2002) and La Porta et al. (2002) both argue that government-owned banks (in another words, well-politically-connected banks) enable politicians to further their own political targets by financing the inefficient but politically desirable industries. As a result, government ownership of banks is related to a lower level of economic growth and financial development and may cause a higher likelihood of banking crisis. Fisman (2001) conducted a unique event study suggesting that an estimated 25 percent of the market capitalization of firms in Indonesia is related to the connection level of former Indonesian President
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Suharto.13 He analyzed the share price return drops in the firms highly-connected to President Suharto and discovered that the large decline proportion is attributed to series news announcements (or even rumors) of the President Suharto's health state.
Chaney, Faccio and Parsley (2011) reveal that the presence of political connections is significantly negatively related to the quality of accounting information. Their evidence shows that political connections have incremental explanatory power beyond country and firm-specific characteristics, and that firms with tighter political connections have the poorer quality accounting earnings information.
Despite the accumulation of theoretical and practical studies on political connections and its negative effects, other literatures show that cultivation of political connection still can have positive effects in the enhancement of firm’s value in transition economies or weak institutional countries. Entrepreneurs in transition economies such as China often encounters hindrance14 in running their own businesses due to the lingering market-supporting institutions; therefore, incentive for entrepreneurs to establish political connections arises in order to overcome these market or state failures. As Li et al. (2008) indicated, entrepreneurial firms connect with Communist Party get a higher likelihood to enhance their performance and value in the weak institutional environment of China. A number of other papers also take an event-study approach and find similar results. (Johnson and Mitton, 2003;
Berkman, Cole and Fu, 2010; Chen et al., 2011) Although vast evidence of positive performance effect contributed by government intervention in China is summarized, Fan et al. (2007) have already shown that highly political-connected firms’
accounting performance is poorer relative to their politically unconnected counterparts. That is to say, Fan et al. (2007) point out when government intervention goes too far, bad things happen due to rent-seeking activities.
The remainder of this paper proceeds as follows. Section 2 shows the motivation for studying in this topic. Section 3 develops the hypotheses and the methodology. Section 4 describes how the database is manually compiled and sources. And then describe how the key variables are constructed and provide descriptive statistics. Regression outcomes and results are documented in Section 5.
Section 6 summarizes the study and provides some concluding remarks.
13 Despite the commonly held belief that every political connection is inherently worthwhile, literatures shows that the value of political connections varies significantly across country-level.
(Fisman, 2001; Faccio, 2006; Faccio, Masulis and McConnell, 2006)
14 For instance, worse infrastructure (telecommunications, roads, electricity, water supply, etc.), unclear tax regulations, weak property rights institution.
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