Emerging Markets Review 18 (2014) 19–33

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Emerging Markets Review

journal homepage: www.elsevier.com/locate/emr

Venture capital, corporate governance, and

financial stability of IPO firms☆
Woody M. Liao a, Chia-Chi Lu b,⁎, Hsuan Wang c
a
Graduate School of Management, University of California, Riverside, CA, United States
b
Graduate Institute of Accounting and Department of Finance, National Central University, Taiwan
c
College of Management, Yuan Ze University, Taiwan

a r t i c l e i n f o a b s t r a c t

Article history: This study investigates the effects of venture capital investments on
Received 12 July 2012 corporate governance and financial stability of IPO-firms in the
Received in revised form 29 October 2013 emerging markets. We find that VC-backed firms have less agency
Accepted 6 November 2013
problems related to excess control than non-VC-backed firms at the
Available online 15 November 2013
time of IPO, and venture capitalists are more likely to improve the
excess control problem in firms with weak-governance-structure
JEL classification:
than those with strong-governance-structure. We also find that
G14
G24
VC-backed firms are less likely to encounter financial difficulty than
G32 non-VC-backed firms. Taken together, VC investments play a role in
mitigating excess control and providing positive financial stability in
Keywords:
the emerging markets.
Corporate governance
Excess control © 2013 Published by Elsevier B.V.
Venture capital investments
Financial stability
Initial public offerings

1. Introduction

Prior research reports that ownership concentration is often found in emerging markets because they
have a large number of firms controlled by a small number of controlling shareholders (Claessens et al.,
2000; Faccio and Lang, 2002; La Porta et al., 1999). Ownership concentration is normally regarded as an
institutional arrangement that facilitates transactions in a weak property rights environment. In such an
ownership concentration environment, controlling shareholders have the power and the incentive to
negotiate and enforce corporate contracts with various stakeholders. According to Shleifer and Vishny
(1997), the benefits for the controlling shareholders are larger in markets that are less developed, or

☆ This research is supported by the Taiwan National Science Council (NSC99-2410-H-008-030). The authors would like to thank
seminar participants at the Department of Finance, National Chengchi University, Taiwan.
⁎ Corresponding author at: National Central University, Tao Yuan County 32001, Taiwan. Tel.: +886 3 4267275.
E-mail address: lunina@ncu.edu.tw (C.-C. Lu).

1566-0141/$ – see front matter © 2013 Published by Elsevier B.V.

http://dx.doi.org/10.1016/j.ememar.2013.11.002
20 W.M. Liao et al. / Emerging Markets Review 18 (2014) 19–33

where property rights are not well defined or protected by judicial systems. However, concentrated
ownership contributes to serious agency problems (Gibson, 2003). Tight ownership control is likely to create
an entrenchment problem that allows self-dealings by the controlling shareholders to go unchallenged
internally by the board of directors or externally by the takeover market. This entrenchment problem can
sometimes come at an expensive price to these firms. For example, prior studies find that, in a weak legal
environment with limited protection of minority rights, controlling shareholders can expropriate minority
shareholders and create harm to the value of the firm (e.g., Claessens et al., 2002; Lins, 2003; Yeh and
Woidtke, 2006). This is so particularly when the controlling shareholders use the pyramidal structures to
obtain voting rights in excess of their cash flow rights. This type of agency problem is widely known as “excess
control” by controlling shareholders.
Given the problem with rising ownership concentration in the emerging markets, a general concern
thus arises as to whether there are alternative governance mechanisms available to improve corporate
governance and protect minority shareholders. Prior research examining the effects of VC investments on
corporate governance documents that venture capitalists can add value to new IPO firms not only in
financing but also in improving corporate governance through board compositions, CEO turnover, and
monitoring systems (Campbell and Frye, 2009; Hellmann and Puri, 2002; Kaplan and Stromberg, 2003;
Lerner, 1995). However, so far little evidence is available regarding the effectiveness of VC investments in
mitigating the serious agency problem related to excess control and maintaining financial stability of
VC-backed firms after initial public offerings. Therefore, the purpose of this study is first to examine the
effect of VC investments on mitigating the agency problem of excess control resulting from ownership
concentration in the emerging markets. Furthermore, given the fact that venture capitalists may retain
their investments for significant periods of time after the IPO (Barry et al., 1990; Hochberg, 2008), we also
investigate whether venture capitalists are effective in ensuring healthy financial stability of their portfolio
firms after initial public offerings.
In order to empirically examine the effectiveness of VC investments in mitigating the extent of excess
control and ensuring healthy financial stability of IPO firms, we focus our analysis on VC investments in
IPO firms in Taiwan emerging markets. Taiwanese experience in VC investments offers several advantages
as a suitable setting to examine our research questions proposed in this study. First, similar to most
emerging markets, Taiwan has a corporate governance environment with weak protection of minority
shareholders, high ownership concentration, and predominance of family-controlled firms. Second, we
focus our sample selection on the technology-based industry which is similar to the work of Lerner (1994).
Lerner analyzes the relationship between venture capitalists and the decision to go public in the
biotechnology industry because a homogeneous data sample permits more refinement of comparisons
between VC-backed and non-VC-backed firms. In our study, VC investments in Taiwan are widely
recognized as a major “technology-oriented” complex in the emerging markets. As presented later in the
next section, both total amount and total number of VC investments in the technology-based industry
stand at more than 70% of the total investments in Taiwan.
Our results in this study show that VC investments significantly mitigate the agency problem of excess
control resulting from ownership concentration arrangements in the emerging markets. Furthermore, we
find that venture capitalists are more likely to improve the governance problem of excess control in IPO
firms with weak governance structure than those with strong governance structure. Finally, we find that
IPO firms backed by VC investments are less likely to encounter financial difficulty or distress than those
not backed by VC funds for 7 years after public offerings.1 Overall, our results indicate that venture
capitalists add value to new IPO firms not only in financing capital needs but also in mitigating the agency
problem of excess control. As a result, venture capitalists are able to ensure better corporate governance
and healthy financial stability in their portfolio firms after initial public offerings.
This paper contributes to the growing literature that examines the important role of venture capitalists in
improving the corporate governance and the agency problems of IPO firms in several ways. First, existing
venture capital studies are generally focused on the impact of VC investments on the board structure and the
corporate governance in IPO firms (Gompers et al., 2005; Kaplan and Stromberg, 2003; Kortum and Lerner,
2000; Lerner, 1999). Little evidence is available regarding the impact of VC investments on the ownership

1
We obtain qualitatively similar results if using 5 years of window after the public offerings for the analysis.
 W.M. Liao et al. / Emerging Markets Review 18 (2014) 19–33 21

structure and agency problems in IPO firms. Our study sheds light on the positive effects of venture capitalists
on mitigating the agency problem related to excess control. Second, while there is a large body of research
addressing corporate governance practices in established firms (see Shleifer and Vishny (1997) for a survey),
there have been relatively few studies examining the nature of corporate governance mechanisms in IPO
firms. Therefore, our study contributes to the emerging body of literature on corporate governance in IPO
firms. Third, our study addresses the impact of venture capitalist on the financial health and stability of IPO
firms after public offerings. This extension increases our understanding of venture capitalists' ability to
protect their portfolio firms for some time after the IPO.
The remainder of this study is organized as follows. Section 2 discusses the development of VC
investments and technology firms in Taiwan. Section 3 reviews relevant literature and develops research
hypotheses. Section 4 describes research design and sample selection. Section 5 presents empirical results.
The final section summarizes our findings and conclusions of the study.

2. Venture capital investments and technology-based industry in Taiwan

In the 1980s, Taiwan imported the know-how of VC investing from the US and developed a strategic
investment strategy to promote the growth of Taiwan technology-based industry.2 This strategy includes
establishing the ground rules for the development of the VC industry3 and investments in technology firms.
For almost three decades, the Taiwanese venture capital program and the technology-based industry have
been remarkably active and successful. As a result, their VC investments have been highly focused on
the development of technology-based firms. Until 1989, the scope of these investments was regulated by
the “Regulations Governing Venture Capital Investment Enterprises” and only allowed for developing
technology-based firms. Even though the government relaxed the restriction of VC investments in 1989, the
majority of their VC investments now still go to the technology-based industry. Up to date, the “big five”
industries in Taiwan are semiconductors, electronics, telecommunications, information, and optoelectronics.
The number and the amount of VC investments in these industries account for 71% and 72.84% respectively of
the current total Taiwanese VC investments.
Currently, venture capital investments in Taiwan are notably active as compared to those in other
emerging markets. As shown in Table 1, the ranking of VC investments as of GDP is number nine in the world
and number four in Asia. Moreover, Taiwan has the most active VC investments in Asia in terms of the number
of new start-up firms and successful venture capital investors (Kenney et al., 2004; Megginson, 2004).
According to the 2005 Yearbook of Taiwan Venture Capital Association, Taiwan's VC market has raised over
NT$180 billion in two decades. Over 400 VC-backed firms have gone public on the Taiwan Stock Exchange
(TSE) or Over the Counter (OTC) markets, while nearly 50% of the firms listed on the TSE and OTC were
VC-backed and 80% of these firms belong to the technology industry. Although VC funds have invested only
NT$170 billion in the technology industry, the investments have created a NT$1.9 trillion industry. These led
Taiwan's VC industry to become one of the most active venture capital markets in the world.
In fact, due to the government's strategic investment policies, Taiwan technology-based firms have been
well-known for their smooth operations and high level of adaptability to changes in business and economic
climates. To date, many Taiwanese firms are world-renowned for their excellence in manufacturing

2
Venture capital investments have been widely credited for financing some of the most successful start-up companies in the
Silicon Valley and across the US.
3
The mechanisms developed by the Taiwanese government for managing and facilitating the development of the VC industry include:

(1) Regulations in governance: the regulations relating to the operation of Taiwanese venture capital funds are “Regulations
Governing Venture Capital Investment Enterprises”, “Scope and Guidelines for Venture Capital Investment Enterprises”, and
“Statute for Upgrading Industries”.
(2) The government investments: the Executive Yuan Development Fund funneled over NT$8400 million towards some funds since
1983. There are 3 series of this DF investing in VC funds. VC investments in Series 1 started on Sept. 17, 1985; Series 2 started on Feb.
26, 1991; and Series 3 started on Jan. 8, 1998. Four VC funds invested NT$384 million in Series 1. Eight VC funds invested NT
$862 million in Series 2. Thirty-nine VC funds invested NT$7215 million in Series 3 (up to 2005). (Source: Development Fund
website: http://www.df.gov.tw/ (mdkknt4524s0l245lx3ol3vv)/dfgov-index.aspx.)
(3) Incentive for private investors to invest in the VC funds: the government provided a 20% income tax credit to individuals and
corporations holding shares in venture funds (available after a two-year vesting period) until May 2001. This tax deduction
was repealed in December 1999 by the 8th amendment of the “Statute for Upgrading Industries”.
22 W.M. Liao et al. / Emerging Markets Review 18 (2014) 19–33

Table 1
Venture capital fund-raising and investments by country, year 2000.

Rank Country Funds raised, year 2000 Investment value, year 2000 Gross domestic product Venture capital
investments

(US$ billions) (US$ billions) (US$ billions) As % of GDP Ranking

1 United States $153.9 $122.1 $9152 1.33 4

2 United Kingdom 16.3 12.2 1442 0.85 6
3 France 6.9 4.9 1432 0.34 10
4 Germany 5.7 4.4 2112 0.21 15
5 Canada 2.8 4.3 635 0.68 7
6 Israel 3.3 3.2 101 3.17 1
7 Italy 2.7 2.8 1171 0.24 13
8 Hong Kong SAR 5.8 2.2 159 1.38 3
9 Sweden 3.4 2.1 239 0.88 5
10 Japan 4.5 2.0 4347 0.05 20
11 Netherlands 2.6 1.8 394 0.46 8
12 Singapore 2.0 1.2 85 1.41 2
13 Taiwan 1.1 1.2 310 0.39 9
14 Spain 1.8 1.0 596 0.17 18
15 Korea 1.6 1.0 407 0.25 12
16 Argentina NA 0.9 283 0.32 11
17 Australia 0.8 0.7 404 0.17 17
18 Switzerland 0.9 0.6 259 0.23 14
19 India 0.8 0.5 447 0.11 19
20 Belgium 0.8 0.5 248 0.20 16
World total $225.0 $177.0 $24,223

Sources from Price Waterhouse Coopers, Global Private Equity 2001 (Palo Alto, CA: September 2001) [www.pwcmoneytree.com],
GDP data, and World Bank Group [www.worldbank.org/data/wdi2001/pdfs/tab4_2.pdf]. The data for Taiwan came from the Institute
for International Management World Competitiveness Yearbook 2001 [www.imd.ch/wcy/criteria/1101.cfm].

technology, making them the world's second largest producers of information and communication hardware.
Consequently, the share of global market held by Taiwanese manufacturers exceeds 70% for several key
technology products, such as notebook PCs, wireless local area network (WLAN) equipment, liquid crystal
display (LCD) products, and optical disk drive (ODD) products. According to the report on “Global
Competitiveness in 2006–2007” issued by the World Economic Forum (WEF), Taiwan ranks sixth in the world
in terms of the Growth Competitiveness Index. In addition, Taiwan ranks second in the world after the US in
terms of international patents per capita. In fact, Taiwan is the only country in East Asia that has closed the
innovation gap with leading Western industrial nations and Japan (Breznitz, 2005).

3. Relevant literature and development of hypotheses

This study investigates three issues regarding the effects of VC investments on the agency problem
related to excess control and financial stability of IPO firms after public offerings. In this section, we review
the literature on the agency problem related to excess control and discuss the effects of venture capital
investments on the governance structure of IPO firms. After that, we develop research hypotheses to test
whether VC investments add value to IPO firms by mitigating excess control and ensuring financial
stability after public offerings.
According to La Porta et al. (1999), when ownership is sufficiently concentrated, the controlling
shareholders are able to control the profit distribution and sometimes deprive minority shareholders of
their rights to share profits. Furthermore, this agency problem can be exacerbated when the controlling
shareholders leverage their control through stock pyramids or cross-shareholdings. Following this
ultimate control concept, we analyze the level of excess control by controlling shareholders as a proxy for
the agency problem of ownership concentration in the emerging markets. In this case, excess control by
controlling shareholders is determined by their voting rights in excess of their cash flow rights. It is
important to note that, while the voting rights measure the degree of control, the cash flow rights measure
the degree of ownership. Thus, the deviation between ownership rights and control rights delineates the
 W.M. Liao et al. / Emerging Markets Review 18 (2014) 19–33 23

controlling shareholders' incentive and hence the firm's agency problem. The higher the voting rights of
the controlling shareholders, the more entrenched is their position, and thus the more they are able to
expropriate wealth from minority shareholders. On the other hand, the higher the cash flow rights of the
controlling shareholders, the higher the cost they bear to expropriate, and thus the more their interests are
aligned with the minority shareholders. Therefore, as the level of excess control relative to the level of
ownership increases, the controlling shareholders become more entrenched, and their incentives to
expropriate minority shareholders increase.
The vital role of venture capitalists in the promotion of new public firms is well documented in the literature
(Barry et al., 1990; Lerner, 1994; Megginson and Weiss, 1991). Venture capitalists are professional and
experienced investors in capital markets. They provide equity financing to new IPO firms where their primary
return is eventual capital gains and dividend yields (Wright and Robbie, 1998). As shareholders of new IPO firms,
venture capitalists are likely to face agency risks due to information asymmetry caused by (1) operating at the
earlier development stage of the new firms, (2) the technological innovation sought by the new firms (Manigart
and Sapienza, 2000), and (3) a more long-term investment horizon of between 5 and 7 years (Gorman and
Sahlman, 1989; Van den Berghe and Levrau, 2002). In order to reduce information asymmetry and increase their
investment returns, venture capitalists often contract to participate in various activities of the new firms through
their screening, monitoring, and decision-support functions. Typically, venture capitalists use their knowledge,
expertise, and contacts to assist the new firms in developing strategic and financial planning and controls (Barry,
1994; Gorman and Sahlman, 1989; MacMillan et al., 1989; Wright and Robbie, 1998). These activities, in addition
to the infusion of capital, are critical to ensure that a steady stream of well-prepared firms goes public. Both
theoretical and empirical research consistently support the general expectation that venture capitalists are
value-added investors and take an active role in developing their portfolio firms (e.g., Gompers et al., 2005;
Kaplan and Stromberg, 2003; Kortum and Lerner, 2000; Lerner, 1999).
An additional benefit of venture capitalists is their contribution to improve the corporate governance
practices of the new IPO firms. Rosenstein (1988) first explores the improvement in the board of
directors of VC-backed firms. He observes that the boards consist of more outsiders and some of them
have a higher degree of expertise in the new IPO firms. Furthermore, he finds that board meetings
frequently revise strategic issues. Baker and Gompers (2003) also examine the determinants of board
structures and the effects of the board structures on the success of the new IPO firms. They find that
venture capitalists shaft the composition of the board of directors of the IPO firms away from insiders and
gray directors and the resulting board structure is more of a compromise between the insiders and the
outside investors. Recently, Boone et al. (2007); Campbell and Frye (2009), and Suchard (2009) also find
similar results to those of Baker and Gompers (2003) in the improvement of the board structure of
VC-backed IPO firms.
Given the success of venture capitalists in improving the board structure of the IPO firms, a related
question that may be asked is whether VC investments mitigate the agency problem related to excess
control in the emerging markets. So far, little evidence is available with respect to the effectiveness of VC
investments in mitigating the agency problem related to excess control. We develop the following
hypotheses to empirically test the effects of VC investments on mitigating excess control by controlling
shareholders.

Hypothesis 1. IPO firms backed by VC investments have less excess control by controlling shareholders
than those not backed by VC investments at the time of IPO.

VC investments in IPO firms may include some with weak corporate governance and others with
strong corporate governance. Regardless of the type of IPO firms, venture capitalists are expected to
concentrate on strengthening the advantages and alleviating the weaknesses of these firms in order to
increase the value of their portfolio investments. As a result, the governing effect of venture capitalists on
mitigating excess control is likely to be greater in VC-backed firms with weak governance than those with
strong governance. Therefore, we develop our second hypothesis below to test this different governing
effect of venture capitalists on excess control by controlling shareholders in IPO firms.

Hypothesis 2. The governing effect of venture capitalists on mitigating excess control is greater in IPO
firms with weak corporate governance than those with strong corporate governance.
24 W.M. Liao et al. / Emerging Markets Review 18 (2014) 19–33

Our final hypothesis is to examine the effect of the involvement of VC investments on financial
stability of IPO firms following their public offerings. Prior research documents that venture capitalists
play an important role in financing and monitoring activities and thus add values in VC-backed IPO
firms. Furthermore, it is reasonable to expect that VC-backed IPO firms are less likely to report the
reversal of earning management because venture capitalists often restrain IPO earning management
(Ahmad-Zaluki et al., 2009). As a result, these IPO firms are more likely to experience stable and
healthy financial prospects than non-VC-backed firms (e.g., Baker and Gompers, 2003; Jain and Kini,
2000; Suchard, 2009). Therefore, we expect that VC-backed IPO firms encounter less financial difficulty
or distress than non-VC-backed IPO firms after public offerings. Accordingly, we develop the following
hypothesis to test the difference in financial stability between VC-backed and non-VC-backed IPO
firms after the IPO.

Hypothesis 3. VC-backed IPO firms encounter less financial difficulty or distress than non-VC-backed
IPO firms after their initial public offerings.

4. Research design

4.1. Sample selection

Our sample firms are technology-based IPO firms listed on the Taiwan Stock Exchange (TSE) and the
Over the Counter (OTC) markets. These new IPOs were issued during 1996 and 2001. The reason for
selecting this sample period is that, in Taiwan, the ownership structure data were only available starting
from 1996 and also we would like to track a seven-year financial stability of the sample IPO firms after the
IPO. All financial data up to 2008 are collected from the database of the Taiwan Economic Journal (TEJ). In
addition, we identify and collect VC investment data from the 2002 Yearbook of the Taiwan Venture
Capital Association (TVCA). We delete those firms that have missing financial data during the sample
period or have their fiscal year not ending on December 31. Our final sample consists of 223 IPO firms,
which include 127 VC-backed firms and 96 non-VC-backed firms.

4.2. Regression models

Our first hypothesis predicts that IPO firms backed by VC investments have less excess control by
controlling shareholders than those not backed by VC investments at the time of IPO. To test this
hypothesis, we use the following pooled cross-sectional regression model:

EXCESS
CONTROLjt ¼ a0 þ a1 VCjt þ a2 OWNERSHIPjt þ a3 AGEjt þ a4 SIZEjt

ð1Þ
þa5 FAMILYjt þ a6 CEOCHAIRjt þ a7 AUDITjt þ εjt

where, for sample firm j at IPO time t, the predicted sign of a1is negative, and

EXCESS_CONTROLjt Corporate agency problems related to excess control which is measured in two ways:
(1) controlling shareholders' voting rights minus their cash flow rights, VOTING-OWNERSHIPjt,
and (2) the ratio of the controlling shareholders' voting rights to their cash flow rights, VOTING/
OWNERSHIPjt;
VCjt An indicator variable taking the value one if the firm at time t is a VC-backed firm and zero
otherwise;
OWNERSHIPjt The percentage of the cash flow (ownership) rights owned by the controlling shareholders;
AGEjt Age of the firm;
SIZEjt The natural logarithm of the firm total assets;
FAMILYjt An indicator variable taking the value one if the firm is a family-controlled firm and zero
otherwise; a firm is defined as a family-controlled firm if the controlling family controls at least
20% of a firm's control rights (e.g., Claessens et al., 2000; Faccio and Lang, 2002; La Porta et al.,
1999; Yeh and Woidtke, 2006);
 W.M. Liao et al. / Emerging Markets Review 18 (2014) 19–33 25

CEOCHAIRjt An indicator variable taking the value one if the CEO also serves as the chair of the board and
zero otherwise;
AUDITjt An indicator variable taking the value one if the firm is audited by a Big-5 auditor and zero otherwise;
εjt Error term.

Hypothesis 2 examines different governing effects of venture capitalists on mitigating excess control
between IPO firms with strong and weak corporate governance. Since venture capitalists are experienced
investors with expertise knowledge in the IPO firms, they are more likely to mitigate the excess control
problem in those firms with weak governance than those with strong governance. To test this hypothesis, we
run the pooled cross-sectional regression model again for each of two subsample groups (those with strong
governance and those with weak governance). Our partition of the subsample groups is based on two criteria:
OWNERSHIP and CONTROLBOARD. First, OWNERSHIP measures the percentage of cash flow rights owned by
the controlling shareholders. When this percentage is large, the controlling shareholders' interest is largely
tied to the performance of the firm. In this case, their incentives are more aligned with that of the minority
shareholders. Consequently, we expect corporate governance to be strong (weak) if OWNERSHIP is large
(small). On the other hand, the second criterion measures the percentage of the controlling shareholders
sitting on the board, CONTROLBOARD. Yeh and Woidtke (2006) study whether a firm's board structure is
indicative of the quality of its corporate governance. They report evidence that, when the majority of directors
are related to the controlling shareholders, an agency conflict is likely to occur between the controlling and
the minority shareholders and thus create weak corporate governance. Therefore, we consider corporate
governance to be strong (weak) if CONTROLBOARD is small (large). As a result, IPO firms with strong (weak)
governance are referred to as those with OWNERSHIP greater (less) than the median or CONTROLBOARD less
(greater) than 50%. In Hypothesis 2, the predicted sign of a1 is more negative for VC-backed IPO firms with
weak governance than those with strong governance.
In Hypothesis 3, we examine the relation between venture capital investments and financial stability of
IPO firms after public offerings. In this study, we measure financial stability in terms of the degree of financial
distress or difficulty in the IPO firms after public offerings. Taiwan Economic Journal (TEJ) maintains an annual
database on Taiwanese security markets. This database provides detailed corporate information about all
listed firms in the Taiwan Stock Exchange and the Over the Counter markets. For example, nine event types
are reported by TEJ as indicators for having financial distress or difficulty in a firm: (1) bounced checks or
bank runs, (2) business closure or bankruptcy, (3) criticism of CPA and skepticism of continuous operation,
(4) restructuring, (5) requesting financial aid and rescue, (6) takeover, (7) full-cash-deliver delist, (8) plant
shutdown, and (9) negative book value. In this study, we consider a firm having healthy financial stability if it
is not reported as having encountered any one of the nine events by TEJ over a seven-year period after public
offerings.
Similar to Baker and Gompers (2003), we collect our financial stability data for each IPO firm over a
period of 7 years after the public offering. We use both the probit and the logit regressions to analyze the
relationship between financial stability and VC-backing for a seven-year period after public offerings.
Since larger, less risky, and better performing firms may be more likely to receive VC financing, we
address the issue of endogeneity in the next section. In addition, we include ownership and other firm
characteristics as control variables along with VC-backing in our probit and logit regression analyses as
follows:

PROBLEM j;tþ7 ¼ b0 þ b1 VCjt þ b2 OWNERSHIPjt þ b3 VOTINGjt þ b4 SIZEjt þ b5 LEV þ b6 PROFITjt

ð2Þ
þb7 AGE þ εjt

where, for sample firm j at IPO time t, the predicted sign of b1 is negative, and

PROBLEMj,t + 7 An indicator variable taking the value one if a firm at or before year t + 7 had financial
distress or difficulty per the TEJ database, and zero otherwise;
VCjt An indicator variable taking the value one if the firm at time t is a VC-backed firm and zero
otherwise;
OWNERSHIPjt The percentage of the cash flow (ownership) rights owned by the controlling shareholders;
VOTINGjt The percentage of the voting rights controlled by the controlling shareholders;
26 W.M. Liao et al. / Emerging Markets Review 18 (2014) 19–33

LEVjt The firm's leverage ratio at the beginning of the fiscal year, calculated by one minus the ratio of
book value of equity to total assets of the firm at the beginning of the fiscal year;
PROFITjt Ordinary income deflated by total assets of the firm at the beginning of the fiscal year;
AGEjt Age of the firm.

4.3. Treatment for endogenous choice of VC investments

It is possible that firm characteristics may essentially determine who receives the VC financing in the
Taiwan technology-based industry. In this case, an endogeneity problem may arise because of self-selection
or VC investments in better performance firms. In order to address this endogenous issue, we design a
selection framework similar to Heckman (1979) to control for endogeneity in the VC investment decisions. As
a result, our regression model is a two-stage estimation model.
In the first-stage equation estimation, VC is the dependent variable (an indicator variable taking a value
of 1 if the firm is a VC-backed firm and 0 otherwise). The independent variables are LEV, PROFIT,
INVESTMENT, and RD. So, we perform first-stage regressions based on the following model:

VC j;tþ7 ¼ c0 þ c1 LEVjt þ c2 PROFITjt þ c3 INVESTMENTjt þ c4 RDjt þ εjt : ð3Þ

In this probit model, LEV = Debt/Assets measures the solvency of a company. We expect the Debt/
Assets ratio to be substantially different between the two sub-sample groups because VC-backed firms
have greater financing needs than non-VC-backed firms. PROFIT = Profit/Assets measures the profitabil-
ity of a firm. Again, because of their greater financing needs, we expect VC-backed firms to have lower
profitability ratio than non-VC backed firms. INVESTMENT = Investment/Assets measures the capital
investment profile of a firm. We consider this as an independent variable because anecdotal evidence
suggests that VC-backed firms typically have a higher investment rate compared to non-VC-backed firms.
Finally, RD measures R&D intensity of a firm. Given that firms with higher R&D intensity have more
innovations, we expect R&D intensity to be substantially different between the two sub-sample groups. As
a result, we obtain a Lambda for the error term from the first-stage probit model estimation.
The Lambda derived from the first-stage model estimation is then added into the second-stage regression
analysis to control for the endogeneity problem. Therefore, in the second stage model estimation, our variable
of interest (excess control or financial stability) is treated as the dependent variable and a number of selected
control variables in addition to VC and the Lambda are considered as the independent variables.

5. Results

5.1. Summary statistics

This study collected a number of technology-based IPO firms listed on the Taiwan Stock Exchange
(TSE) and the Over the Counter (OTC) markets, and were issued during 1996 and 2001. Collection of the
sample was started from 1996 onwards, because the variables regarding ownership structure were only
available starting from that year. The sample collection was ended in 2001, since we would like to track a
seven-year performance of these sample firms after they go public. This time period yields a sample of 223
technology-based IPO firms. Table 2 reports the distribution of the sample firms by year. As shown, there
are approximately 57% of technology-based IPO firms backed by venture capitalists, suggesting that
venture capital backing plays a significant role in facilitating the process of IPOs in Taiwan. Except for
1997, the number of total IPO firms is increasing every year during the sample period. However, the
percentage of VC-backed firms is going down between 1996 and 1999, and then slightly going up between
1999 and 2001. This trend is consistent with the performance of Taiwan stock markets in this period.
This finding is also consistent with the documentation of prior studies showing that venture capitalists
are professional investors in the IPO capital market and VC-backed firms often find a better timing to
go public.
 W.M. Liao et al. / Emerging Markets Review 18 (2014) 19–33 27

Table 2
Taiwanese technology-based IPO firms (1996–2001).

Non-VC-backed VC-backed Total firms Percentage of VC-backed IPOs

IPO year N N N %

1996 6 14 20 70.00
1997 4 10 14 71.42
1998 13 22 35 62.86
1999 23 15 38 39.47
2000 28 29 57 50.88
2001 22 37 59 62.71
Total 96 127 223 56.95

5.2. Empirical results of VC on corporate governance

We first compute the t-statistics to test for the difference in the means of each variable for VC-backed firms
and non-VC-backed firms. Table 3 reports the results of the mean tests. As shown, OWNERSHIP, VOTING,
CONTROLBOARD, AGE, PROBLEM, and LEV in VC-backed firms are significantly lower than those in
non-VC-backed firms at a less than 10% level, while SIZE in VC-backed firms is significantly higher than that in
non-VC-backed firms at a less than 10% level. These results indicate that firms backed by VC funds have the
following characteristics: smaller ownership rights (OWNERSHIP), smaller voting rights (VOTING), larger size
(SIZE), younger age (AGE), less likely to have financial distress or difficulty (PROBLEM), and lower debt to
asset ratio (LEV).
Next, we provide multiple regression analyses to test our three hypotheses. In Hypothesis 1, we test
whether IPO firms backed by VC investments have less excess control than those not backed by VC
investments. Table 4 presents the results of regressing EXCESS_CONTROL, proxied by two different

Table 3
Mean test results.

Non-VC-backed (N = 96) VC-backed (N = 127) t value for difference in means

Mean Mean

VOTING-OWNERSHIP 0.07 0.08 −0.41

VOTING/OWNERSHIP 2.32 3.06 −0.90
OWNERSHIP 29.29 22.12 3.11***
VOTING 36.21 29.65 3.00***
CONTROLBOARD 0.63 0.56 2.77**
CEOCHAIR 0.39 0.35 0.47
FAMILY 0.36 0.30 1.03
SIZE 14.30 14.78 −3.36***
AGE 15.05 11.83 3.39***
AUDIT 0.86 0.91 −1.16
PROBLEM 0.18 0.10 1.69*
LEV 0.41 0.38 1.69*
PROFIT 0.09 0.09 −0.74

VOTING-OWNERSHIP: controlling shareholders' voting rights minus their cash flow rights; VOTING/OWNERSHIP: the ratio of the
controlling shareholders' voting rights to their cash flow rights; OWNERSHIP: the percentage of the cash flow (ownership) rights
owned by the controlling shareholders; VOTING: the percentage of the voting rights controlled by the controlling shareholders;
CONTROLBOARD: the percentage of the controlling shareholders sitting on the board; AGE: age of the firm; SIZE: the natural
logarithm of the firm total assets; FAMILY: an indicator variable taking the value one if the firm is a family-controlled firm and zero
otherwise; a firm is defined as a family-controlled firm if the controlling family controls at least 20% of a firm's control rights (e.g.,
Claessens et al., 2000; Faccio and Lang, 2002; La Porta et al., 1999; Yeh and Woidtke, 2006); CEOCHAIR: an indicator variable taking
the value one if the CEO also serves as the chair of the board and zero otherwise; AUDIT: an indicator variable taking the value one if
the firm is audited by a Big-5 auditor and zero otherwise; PROBLEM: an indicator variable taking the value one if a firm at or before
year t + 7 had financial distress or difficulty per the TEJ database, and zero otherwise; LEV: the firm's leverage ratio at the beginning
of the fiscal year, calculated by one minus the ratio of book value of equity to total assets of the firm at the beginning of the fiscal
year; PROFIT: ordinary income deflated by total assets of the firm at the beginning of the fiscal year. ***, **, and * indicate that
coefficient is significant at the 1%, 5%, and 10% levels, respectively.
28 W.M. Liao et al. / Emerging Markets Review 18 (2014) 19–33

Table 4
Multiple regression results of the relation between excess control and VC-backing.

Panel A: Analysis of venture capitalist's likelihood of investing in a company (probit model)

Coefficient z Coefficient z

INTERCEPT 0.43 1.34 0.43 1.34

LEV −1.08 −1.81* −1.08 −1.81*
PROFIT −0.07 −0.07 −0.07 −0.07
INVESTMENT 0.15 0.30 0.15 0.30
RD 0.01 2.60*** 0.01 2.60***

Panel B: Excess control and VC regression controlling for self-selection

VOTING-OWNERSHIP VOTING/OWNERSHIP

Coefficient t-Stat. Coefficient t-Stat.

INTERCEPT 0.02 0.16 5.19 1.10

VC −0.04 −3.65*** −1.60 −2.82***
OWNERSHIP −0.01 −10.10*** −0.19 −4.89***
CEOCHAIR −0.03 −0.26 −0.78 −1.38
FAMILY 0.15 8.90*** 4.83 3.50***
AGE −0.01 −1.99** −0.11 −2.60***
SIZE 0.02 2.34** 0.61 1.51
AUDIT 0.02 1.50 0.27 0.50
Lambda −0.08 −2.14** −8.45 −1.81*
N 223 223
F value 19.16*** 3.87***
Adj. R2 0.54 0.36

VOTING-OWNERSHIP: controlling shareholders' voting rights minus their cash flow rights; VOTING/OWNERSHIP: the ratio of the
controlling shareholders' voting rights to their cash flow rights; VC: an indicator variable taking the value one if the firm at time t is a
VC-backed firm and zero otherwise; OWNERSHIP: the percentage of the cash flow (ownership) rights owned by the controlling
shareholders; CEOCHAIR: an indicator variable taking the value one if the CEO also serves as the chair of the board and zero
otherwise; FAMILY: an indicator variable taking the value one if the firm is a family-controlled firm and zero otherwise; a firm is
defined as a family-controlled firm if the controlling family controls at least 20% of a firm's control rights (e.g., Claessens et al., 2000;
Faccio and Lang, 2002; La Porta et al., 1999; Yeh and Woidtke, 2006); AGE: age of the firm; SIZE: the natural logarithm of the firm
total assets; AUDIT: an indicator variable taking the value one if the firm is audited by a Big-5 auditor and zero otherwise; LEV: the
firm's leverage ratio at the beginning of the fiscal year, calculated by one minus the ratio of book value of equity to total assets of
the firm at the beginning of the fiscal year; PROFIT: ordinary income deflated by total assets of the firm at the beginning of the fiscal
year; INVESTMENT: capital expenditures deflated by beginning-of-year book value of assets; RD: R&D expenses deflated by
beginning-of-year book value of assets. The t-statistics are based on White's (1980) standard errors. ***, **, and * indicate that
coefficient is significant at the 1%, 5%, and 10% levels, respectively.

measures (VOTING-OWNERSHIP and VOTING/OWNERSHIP), on VC and a set of selected control variables.

The results in these two regression analyses are similar. The coefficients for the VC-backed indicator are
negative at the 1% and 5% levels, respectively. All control variables enter with anticipated signs in both
regressions. Among them, the coefficients on OWNERSHIP and AGE are significantly and negatively related
to EXCESS_CONTROL, while the coefficients on FAMILY and SIZE are significantly and positively related to
EXCESS_CONTROL. Therefore, the results from both of the regression analyses support Hypothesis 1.
Hypothesis 2 tests whether the governing effect of venture capitalists in firms with weak governance
structure is greater than that with strong governance structure. To test this hypothesis, we first partition
the sample firms into two subsample groups (firms with strong governance structure and firms with weak
governance structure). We then run two separate regressions for these two subsample groups. Table 5
presents the results of regressing excess control (VOTING-OWNERSHIP) on VC and the selected control
variables for each subsample group. Since there is no perfect proxy for strong and weak governance firms,
we use two proxies to classify the sample firms into strong and weak governance groups. The first proxy
measures the ownership of the controlling shareholders (OWNERSHIP) and the second proxy measures
the percentage of the controlling shareholders sitting on the board (CONTROLBOARD). For the purpose of
easy comparison of these results, Table 5 reports the results of four regression cases (2 firm groups × 2
controlling proxies). These results show that the coefficient on VC is significantly negative in subsample
firms with weak governance but insignificant in those with strong governance regardless which proxy is
 W.M. Liao et al. / Emerging Markets Review 18 (2014) 19–33 29

Table 5
Multiple regression results of the relation between excess control (voting rights–cash flow rights) and VC-backing in subsample
firms with weak governance and strong governance.

Panel A: Analysis of venture capitalist's likelihood of investing in a company (probit model)

Coefficient z value Coefficient z value Coefficient z value Coefficient z value

INTERCEPT 0.63 1.45 0.42 1.12 −0.41 −0.71 0.37 0.55

LEV −0.93 −1.03 −1.46 −2.14** −0.71 −0.81 0.83 0.57
PROFIT −0.70 0.56 0.11 0.10 2.65 1.31 0.74 0.30
INVESTMENT 0.43 0.66 0.21 0.38 0.01 0.01 −1.05 −0.93
RD 0.01 1.02 0.02 2.52*** 0.01 2.88*** 0.01 1.01

Panel B: Excess control and VC regression in weak and strong governance firms controlling for self-selection

Weak governance Strong governance

c
OWNERSHIP ≤ 24 CONTROLBOARD ≥ 0.5 OWNERSHIP N 24 CONTROLBOARD b 0.5

Coefficient t-Stat. Coefficient t-Stat. Coefficient t-Stat. Coefficient t-Stat.

INTERCEPT −0.02 −0.18 −0.02 −0.14 −0.05 −0.29 −0.22 −1.70*

VC −0.06 −3.10*** −0.03 −2.36** −0.01 −0.32 −0.02 −0.91
OWNERSHIP −0.01 −3.59*** −0.01 −11.71*** −0.01 −2.89*** −0.01 −2.49**
CEOCHAIR −0.02 −1.04 −0.01 −0.88 0.01 0.62 0.01 0.84
FAMILY 0.28 14.01*** 0.16 9.68*** 0.07 2.14** 0.13 2.78***
AGE −0.01 −3.19*** −0.01 −1.68* −0.01 −0.23 −0.01 −0.90
SIZE 0.01 2.04** 0.02 1.91* 0.01 1.06 0.02 2.45**
AUDIT −0.01 −0.48 0.03 1.67* 0.03 2.27** 0.01 0.36
Lambda 0.06 0.75 −0.01 −0.43 0.02 1.04 0.01 0.02
N 112 171 111 52
F value 60.59*** 21.84*** 2.54** 1.98*
Adj. R2 0.68 0.61 0.27 0.38

VOTING−OWNERSHIP: controlling shareholders' voting rights minus their cash flow rights; VC: an indicator variable taking the
value one if the firm at time t is a VC-backed firm and zero otherwise; OWNERSHIP: the percentage of the cash flow (ownership)
rights owned by the controlling shareholders; CEOCHAIR: an indicator variable taking the value one if the CEO also serves as the
chair of the board and zero otherwise; FAMILY: an indicator variable taking the value one if the firm is a family-controlled firm and
zero otherwise; a firm is defined as a family-controlled firm if the controlling family controls at least 20% of a firm's control rights
(e.g., Claessens et al., 2000; Faccio and Lang, 2002; La Porta et al., 1999; Yeh and Woidtke, 2006); AGE: age of the firm; SIZE: the
natural logarithm of the firm total assets; AUDIT: an indicator variable taking the value one if the firm is audited by a Big-5 auditor
and zero otherwise; Lambda: the inverse Mills' ratio produced from the selection model; LEV: the firm's leverage ratio at the
beginning of the fiscal year, calculated by one minus the ratio of book value of equity to total assets of the firm at the beginning of the
fiscal year; PROFIT: ordinary income deflated by total assets of the firm at the beginning of the fiscal year; INVESTMENT: capital
expenditures deflated by beginning-of-year book value of assets; RD: R&D expenses deflated by beginning-of-year book value of
assets. The t-statistics are based on White's (1980) standard errors. ***, **, and * indicate that coefficient is significant at the 1%, 5%,
and 10% levels, respectively.

used to classify the subsample groups. Therefore, these results indicate that the negative relationship
between excess control and VC investments is significant in IPO firms with weak governance, but not in IPO
firms with strong governance. All control variables appear to enter with significant signs except for AGE,
CEOCHAIR, and AUDIT. The coefficient on AGE is significantly negative in the regression for subsample firms
with weak governance but insignificant in the regression for those with strong governance. This result
indicates that excess control is likely to be affected by the firm age in IPO firms with weak governance, but not
in those with strong governance. In addition, CEOCHAIR and AUDIT enter with the anticipated signs and
usually have insignificant coefficients.
Similarly, Table 6 reports the results of regressing excess control (VOTING/OWNERSHIP) on VC and the
selected control variables for each of the four regression cases. The results in Table 6 are mostly consistent
with those presented in Table 5. The only exceptions are in the coefficients on SIZE, which enters with
significant and anticipated signs in 3 out of 4 cases in Table 5 but only marginally significant in 2 out 4
cases in Table 6. Apart from this minor difference, Tables 5 and 6 display similar results in support of
Hypothesis 2.
30 W.M. Liao et al. / Emerging Markets Review 18 (2014) 19–33

Table 6
Multiple regression results of the relation between excess control (voting rights/cash flow rights) and VC-backing in subsample
firms with weak governance and strong governance.

Panel A: Analysis of venture capitalist's likelihood of investing in a company (probit model)

Coefficient z value Coefficient z value Coefficient z value Coefficient z value

INTERCEPT 0.63 1.45 0.42 1.12 −0.41 −0.71 0.37 0.55

LEV −0.93 −1.03 −1.46 −2.14** −0.71 −0.81 0.83 0.57
PROFIT −0.70 −0.56 0.11 0.10 2.65 1.31 0.74 0.30
INVESTMENT 0.43 0.66 0.21 0.38 0.01 0.01 −1.05 −0.93
RD 0.01 1.02 0.01 2.52** 0.01 2.88*** 0.01 1.01

Panel B: Excess control and VC regression in weak and strong governance firms controlling for self-selection

Weak Governance Strong Governance

c
OWNERSHIP ≤ 24 CONTROLBOARD ≥ 0.5 OWNERSHIP N 24 CONTROLBOARD b 0.5

Coefficient t-Stat. Coefficient t-Stat. Coefficient t-Stat. Coefficient t-Stat.

INTERCEPT 3.99 0.49 −0.39 −0.06 1.13 2.19** −1.72 −0.54

VC −2.79 −2.40** −1.29 −2.07** −0.01 −0.04 −0.41 −0.90
OWNERSHIP −0.47 −4.22*** −0.23 −4.97*** −0.02 −2.87*** −0.05 −2.28**
CEOCHAIR −1.39 −1.38 −0.87 −1.28 0.01 0.17 −0.26 −0.84
FAMILY 5.01 1.80* 5.22 3.48*** 0.25 1.97* 1.36 2.91***
AGE −0.16 −1.78* −0.13 −2.66*** −0.01 −0.58 −0.02 −1.16
SIZE 1.18 1.55 0.95 1.66* 0.02 0.79 0.30 1.55
AUDIT −0.83 −0.74 0.81 1.11 0.09 2.35** 0.04 0.11
Lambda −12.74 −0.99 −5.41 −1.42 0.08 1.23 0.58 0.52
N 112 171 111 52
F value 4.86*** 3.99*** 3.21*** 3.38***
Adj. R2 0.43 0.39 0.30 0.21

VOTING/OWNERSHIP: the ratio of the controlling shareholders' voting rights to their cash flow rights; VC: an indicator variable
taking the value one if the firm at time t is a VC-backed firm and zero otherwise; OWNERSHIP: the percentage of the cash flow
(ownership) rights owned by the controlling shareholders; CEOCHAIR: an indicator variable taking the value one if the CEO also
serves as the chair of the board and zero otherwise; FAMILY: an indicator variable taking the value one if the firm is a
family-controlled firm and zero otherwise; a firm is defined as a family-controlled firm if the controlling family controls at least 20%
of a firm's control rights (e.g., Claessens et al., 2000; Faccio and Lang, 2002; La Porta et al., 1999; Yeh and Woidtke, 2006); AGE: age of
the firm; SIZE: the natural logarithm of the firm total assets; AUDIT: an indicator variable taking the value one if the firm is audited
by a Big-5 auditor and zero otherwise; Lambda: the inverse Mills' ratio produced from the selection model; LEV: the firm's leverage
ratio at the beginning of the fiscal year, calculated by one minus the ratio of book value of equity to total assets of the firm at the
beginning of the fiscal year; PROFIT: ordinary income deflated by total assets of the firm at the beginning of the fiscal year;
INVESTMENT: capital expenditures deflated by beginning-of-year book value of assets; RD: R&D expenses deflated by
beginning-of-year book value of assets. The t-statistics are based on White's (1980) standard errors. ***, **, and * indicate that
coefficient is significant at the 1%, 5%, and 10% levels, respectively.

5.3. Empirical results of VC on financial stability

Hypothesis 3 tests whether VC-backed IPO firms encounter less financial difficulty or distress than
non-VC-backed IPO firms following their public offerings. Table 7 presents the results of regressing
PROBLEM on VC and a set of selected control variables that may account for financial difficulty or distress
in IPO firms 7 years after public offerings. As expected, the coefficients on VC are significantly negative at
the 10% level in both probit and logit regression analyses. These results indicate that VC-backed IPO firms
are financially healthier and stronger than non-VC-backed IPO firms 7 years after the IPO. With respect to
control variables, we find that OWNERSHIP, SIZE, VOTING, and LEV are not significantly related to financial
difficulty or distress of the IPO firms following public offerings. However, control variables for other firm
characteristics (PROFIT and AGE) in the IPO year have negative and significant effects on their financial
distress or difficulty following initial public offerings. Overall, our results show that non-VC-backed IPO
firms are more likely to encounter financial distress or difficulty than VC-backed IPO firms after public
offerings.
 W.M. Liao et al. / Emerging Markets Review 18 (2014) 19–33 31

Table 7
Multiple regression results of the relationship between financial stability and VC-backing.

Panel A: Analysis of venture capitalist's likelihood of investing in a company (probit model)

Coefficient z value Coefficient z value

INTERCEPT 0.43 1.34 0.43 1.34

LEV −1.08 −1.81* −1.08 −1.81*
PROFIT −0.07 −0.07 −0.07 −0.07
INVESTMENT 0.15 0.30 0.15 0.30
RD 0.01 2.60*** 0.01 2.60***

Panel B: Financial stability and VC regression controlling for self-selection

Probit model Logit model

Coefficient z value Coefficient z value

INTERCEPT 3.19 1.14 5.47 0.98

VC −0.46 −1.78* −0.79 −1.65*
OWNERSHIP 0.01 0.19 −0.01 −0.13
VOTING −0.01 −1.08 −0.02 −0.84
SIZE −0.26 −1.45 −0.46 −1.26
LEV 1.64 1.20 2.34 0.87
PROFIT −3.24 −2.51** −5.37 −2.19**
AGE −0.05 −2.48** −0.09 −2.14**
Lambda 0.38 0.28 1.27 0.48
N 223 223
Wald chi2 21.92*** 21.97***
Pseudo R2 0.16 0.15

PROBLEM: an indicator variable taking the value one if a firm at or before year t + 7 had financial distress or difficulty per the TEJ
database, and zero otherwise; VC: an indicator variable taking the value one if the firm at time t is a VC-backed firm and zero
otherwise; OWNERSHIP: the percentage of the cash flow (ownership) rights owned by the controlling shareholders; VOTING: the
percentage of the voting rights controlled by the controlling shareholders; SIZE: the natural logarithm of the firm total assets; LEV:
the firm's leverage ratio at the beginning of the fiscal year, calculated by one minus the ratio of book value of equity to total assets of
the firm at the beginning of the fiscal year; PROFIT: ordinary income deflated by total assets of the firm at the beginning of the fiscal
year; AGE: age of the firm; Lambda: the inverse Mills' ratio produced from the selection model; INVESTMENT: capital expenditures
deflated by beginning-of-year book value of assets; RD: R&D expenses deflated by beginning-of-year book value of assets. The
t-statistics are based on White's (1980) standard errors. ***, **, and * indicate that coefficient is significant at the 1%, 5%, and 10%
levels, respectively.

5.4. Additional tests

Although our sample accounts for 70% of the VC investments in Taiwan, it is still intriguing to
investigate the results for the non-tech IPOs and see if the results are different between tech and non-tech
IPOs. Therefore, we further investigate if our previous results are different between tech and non-tech
IPOs. We add a dummy variable (TECH) which is equal to 1 if the firm is a high-tech IPO and an interaction
term (VC ∗ TECH) into the regression to examine if our results are different between tech and non-tech
IPOs. Untabulated results suggest that, after including these two variables into models (1) and (2), the
interaction term (VC ∗ TECH) is insignificantly negative in both models, indicating that our results
between tech and non-tech IPOs are not significantly different.

6. Conclusions

Ownership concentration often leads to the agency problem of excess control in the emerging markets.
This study examines whether the presence of venture capitalists mitigates excess control at the time of IPO
and further ensures financial stability in the IPO firms after public offerings. Using data collected from
Taiwan technology firms, we conduct three separate regression analyses to examine: (1) whether venture
capitalists mitigate the level of excess control in the VC-backed firms at the time of IPO, (2) whether there
are more mitigating effects of venture capitalists on excess control in IPO firms with weak governance
32 W.M. Liao et al. / Emerging Markets Review 18 (2014) 19–33

structures than those with strong governance structures, and (3) whether financial stability in VC-backed
firms is greater than non-VC-backed firms after the initial public offerings.
As expected, our results show significant effects of venture capitalists on mitigating excess control by
controlling shareholders at the time of IPO and ensuring financial stability in IPO firms after the IPO.
Specifically, we first find that VC-backed IPO firms are more likely to have less excess control by controlling
shareholders than non-VC-backed IPO firms at the time of IPO. This result indicates that venture capitalists
significantly mitigate the agency conflict problem between the controlling shareholders and minority
shareholders in the emerging markets. Second, we find that venture capitalists are more likely to mitigate
excess control in IPO firms with weak corporate governance structures than those with strong corporate
governance structures. This result suggests that venture capitalists have more need and desire to protect their
investments in IPO firms with weak governance by mitigating excess control. Third, we find that, compared to
non-VC-backed IPO firms, VC-backed firms are less likely to encounter financial difficulty or distress after
their public offerings. This result indicates that venture capitalists have incentives to ensure financial health
and stability in their portfolio firms after the initial public offerings.
Overall, our results in this study provide evidence that venture capitalists play an important role not
only in providing investment funds but also in mitigating agency problems related to excess control and
ensuring financial stability of IPO firms in the emerging markets.

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