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Governmental venture capital and investor sentiment: Evidence from Chinese government guidance funds

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  • Huang, Xinfei
  • Zhang, Yue
  • Zong, Zhe

Abstract

While the role of government-backed venture capital (GVC) in influencing companies’ operating performance has been well-documented, its potential impact on the financial market remains less explored. This paper aims to fill this gap in the context of China’s venture capital market. Since 2002, the Chinese government has launched a type of policy VC fund—government guidance funds (GGFs)—to stimulate innovation, industrial transformation, and local economic growth. Using a sample of 2,860 IPO companies from 2010 to 2021, we show that GGF-backed IPOs exhibited higher initial returns than both non-VC-backed and non-GGF VC-backed IPOs. A decomposition of the initial returns reveals that this effect was driven by market overvaluation rather than IPO price discounts. Consistent with investor sentiment and signaling theory, our results suggest that investors held optimistic views towards GGF-backed companies. However, when assessing post-IPO operating and innovation performance, GGF-backed companies did not outperform their counterparts. Overall, this paper highlights the signaling effects of GGFs in the financial market and provides important policy implications for the design of GVC programs worldwide.

Suggested Citation

  • Huang, Xinfei & Zhang, Yue & Zong, Zhe, 2025. "Governmental venture capital and investor sentiment: Evidence from Chinese government guidance funds," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:intfin:v:99:y:2025:i:c:s1042443125000101
    DOI: 10.1016/j.intfin.2025.102120
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    Keywords

    Venture capital; Government guidance funds; IPO initial return; Market overvaluation; Investor sentiment; Signaling theory;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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