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| The Ineffective Innovation Signals or the Insufficient Incentive:The Mystery of the Low Efficiency of Venture Capital Market on the Resource Allocation of Science and Technology Enterprises |
| Ma Renmin,Zhang Dixin,Ge Yang |
| (Institute of Economics,Nanjing University, Nanjing 210000, China) |
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Abstract China's venture capital market for technology start-ups has been in a situation of insufficient effective supply owing to its late start and short development time. The risk aversion of venture capital (VC) to technology start-ups has resulted in a mismatch of resources, leading to inefficient resource allocation to technology enterprises in the VC market, and inhibiting R&D investment and technological innovation in technology start-ups. In view of the long-term market failure in China's venture capital market,this paper investigates the reasons for the inefficient allocation of resources to technology start-ups in China's venture capital market based on signaling and incentive theories. By constructing a dynamic game model with imperfect information, it fulfills the preconditions for the existence of a separating equilibrium in which firms with strong innovation capabilities tend to signal and can be supported by venture capital (VC): the effectiveness of innovation signals (the distinguishability of innovation signals to firms' innovation capabilities and the identifiability of innovation signals to VCs) and the incentive compatibility of VCs to invest in innovative firms. The empirical evidence based on the data of technology enterprises listed in 2005-2020 shows that firstly the in novation performance of technology enterprises receiving VC investment in China is significantly higher than that of technology enterprises not invested by VC, but there is no significant relationship between the intensity of VC investment and the innovation performance of enterprises, indicating that China's venture capital market possesses the role of resource allocation to technology enterprises, but it is inefficient; secondly patent application behavior as an innovation signal can effectively reflect the innovation ability of enterprises and be identified by VC, indicating that the innovation signal constructed in this paper has validity; lastly the low excess return rate on VC investment returns to innovative enterprises gives VCs insufficient incentives to invest in innovative enterprises, which leads to the inability of the venture capital market to achieve segregated equilibrium and reduces the efficiency of market resource allocation. The robustness test results are consistent with the findings of the empirical study.#br#Thus,it is suggested that government departments should continue to deepen the reform of the issuance and trading systems of the securities market, such as the Science and Technology Innovation Board and the registration system, to enhance the maturity and inclusiveness of the capital market. On the one hand, the launch of the Science and Technology Innovation Board will provide a smooth exit channel for VCs investing in technology enterprises, guiding VCs to invest more actively in technology start-ups; on the other hand, the promotion of the registration system will lower the threshold of financial indicators for listing and increase the speed of IPO issuance, which will lead to a decrease in the overall valuation premium and liquidity level of listed companies, but innovative enterprises with scarcity will obtain a higher valuation pricing, enhancing the return on innovation premium returns from VC investments in technology companies going public. Although the registration system has been steadily promoted in the A-share market since 2021, the current substantive review phase controlled by the exchanges and the SFC still plays a decisive role in the process of listing companies. Therefore, the financial regulators should expeditiously promote the effective implementation of the registration system in accordance with the provisions of the Securities Law, and further leverage the role of the capital market in optimizing resource allocation.#br#The innovations and contributions of this paper are as follows. Firstly, a dynamic game-theoretic model of the investment and financing activities between VCs and technology enterprises with incomplete information is constructed and solved under the premise of market incentives, which enriches the academic application of signal theory in the field of venture capital. Secondly, it verifies the value discovery ability of VCs to innovative enterprises, and provides reference for the government to continuously promote the development of the venture capital market. Thirdly, this study finds that the A-share market's insufficient market incentives for VCs to return returns on investment in innovative enterprises have led the venture capital market to deviate from equilibrium. It also provides data support of practical significance for financial regulators to further improve the issuance system of the securities market and enhance the resource allocation efficiency of the venture capital market.#br#
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Received: 18 April 2022
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