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Do international investors enhance private firm value? Evidence from venture capital

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Abstract

We examine the impact of international venture capital investors on private firm success spanning 81 countries over the years 1995–2010. The data examined indicate that, relative to deals in which the investor base is purely domestic, private firms that have an international investor base have a higher probability of exiting via an initial public offering (IPO) and higher IPO proceeds. The evidence is consistent with the view that while the benefits of internationalization may be difficult and costly to manage, for those firms that succeed in managing cross-border coordination costs, there is potential value for an IPO firm. The benefits relative to the costs of internationalizing the investor base for private firms sold in acquisitions, by contrast, are much less pronounced. The most important source of this benefit appears to be access to capital.

Abstract

Nous étudions l'impact des investisseurs internationaux de capital risque sur la performance des entreprises privées couvrant 81 pays sur la période 1995–2010. Les données analysées indiquent que, par rapport aux opérations pour lesquelles la base d’investisseurs est purement domestique, les entreprises privées qui ont un investisseur international ont une probabilité plus forte de sortie via une offre publique initiale (OPI) et des revenus OPI plus élevés. Ce constat est cohérent avec l’idée que, si les bénéfices associés à l'internationalisation peuvent être difficiles et coûteux à gérer pour les entreprises qui réussissent à gérer les coûts de coordination transfrontalière, il y a une valeur potentielle pour une entreprise faisant l'objet d'une OPI. En revanche, les bénéfices relatifs aux coûts d'internationalisation de la base d’investisseurs, pour des entreprises privées vendues dans le cadre d’acquisitions, sont moins prononcés. La source la plus importante de ce bénéfice semble être l'accès au capital.

Abstract

Nosotros examinamos el impacto de los inversionistas internacionales de capital de riesgo en el éxito de empresas privadas abarcando 81 países entre los años 1995-2010. Los datos examinados indican que, en relación con las transacciones en el que la base de inversionistas es puramente local, las empresas privadas que tienen una base de inversionistas internacionales tienen una mayor probabilidad de salir a través de una oferta pública inicial (OPI) y mayores ingresos de colocación en bolsa. La evidencia es consistente con la posición de que mientras que los beneficios de la internacionalización pueden ser difíciles y costosos de administrar, para aquellas empresas que tienen éxito en la gestión de costos de coordinación internacional, hay un valor potencial para una firma que haya salida a bolsa. Los beneficios relativos a los costos de la internacionalización de la base de inversionistas para las empresas privadas vendidas en adquisiciones, en contraste, son mucho menos pronunciadas. La fuente más importante de este beneficio parece ser el acceso a capital.

Abstract

Nós examinamos o impacto de investidores internacionais de capital de risco no sucesso da empresa privada abrangendo 81 países ao longo dos anos de 1995 a 2010. Os dados analisados indicam que, em relação aos negócios em que a base de investidores é de empresas puramente nacionais, empresas privadas que têm uma base de investidores internacionais têm uma maior probabilidade de saída através de uma oferta pública inicial (IPO) e maiores IPO ocorrem. As evidências são consistentes com a visão de que, enquanto os benefícios da internacionalização podem ser difíceis e onerosos para gerenciar, para as empresas que tiveram sucesso na gestão de custos de coordenação transfronteiriços, há um valor potencial para uma empresa de IPO. Os benefícios relativos aos custos de internacionalização da base de investidores para empresas privadas vendidas em aquisições, ao contrário, são muito menos pronunciados. A fonte mais importante deste benefício parece ser o acesso ao capital.

Abstract

我们调查了在1995—2010年之间, 跨越81个国家, 国际风险资本投资者对私营企业成功的影响。调查数据表明, 相对于纯粹是国内的投资者基础的交易, 具有国际投资者基础的私营企业有更高的几率通过首次公开募股 (IPO) 退出和更高的IPO收益。该证据与这一观点一致: 即尽管国际化的效益管理起来可能是困难和昂贵的, 但是对那些成功管理跨境协调成本的企业而言, IPO企业具有潜在的价值。与购并中出售的私营企业投资者基础的国际化成本相关的效益, 相比之下, 则不太明显。这种收益最重要的来源似乎是获取资本。

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Notes

  1. The home bias literature addresses many reasons why investors opt to invest in companies within close proximity – that is, in the same country, to them. See, for example, Chan, Covrig, and Ng (2005) for reasons why investors opt for familiarity. It is noteworthy that much of this literature examines public firms (vs the private firms we examine in our article).

  2. Since private firms in most countries are not required to disclose financial information, obtaining reliable data on cost of capital is not tractable. We therefore focus on metrics that are more reliable and accessible such as exit outcome and performance of exits such as M&A (deal value) and IPO (proceeds).

  3. We do not mean to suggest here that maximizing deal value/proceeds is the only goal of PCs exiting via M&A or IPO, respectively. A survey by Graham and Harvey (2001) suggests that CFOs rate the following motives for issuing common stock (for the almost 40% of private firm respondents, this equates to an IPO) most important: providing shares for compensation, high stock price, sufficient profits to fund activities and maintaining a target debt-to-equity ratio. All of these are consistent with maximizing proceeds.

  4. Results are robust to dropping those firms who have not exited by 2005 and are available upon request.

  5. The inclusion of Portfolio size/mgr reduces the sample size by roughly half due to missing data. Following Cumming and Knill (2012) we replace missing values of Portfolio size/mgr with 1. Results are robust to omitting this replacement and are available upon request.

  6. Results are robust for other proxies of expertise, such as prior IPO success (Nahata, 2008).

  7. Following Schertler and Tykova (2012), in previous analyses we use the differences between PC and VC nations as alternative macroeconomic measures. Our results were robust to this change.

  8. Results are robust to using number of listed firms rather than market turnover as our measure of stock market development. Due to high multicollinearity between the two proxies, both could not be included in the analyses.

  9. We obtain the longitude and latitude for the nations from the CEPII website (http://www.cepii.fr/CEPII/fr/bdd_modele/download.asp?id=6).

  10. If a country does not have any international VC investment, we replace the domestic CMLOF value with the highest ranking of our index value in our sample (2.72).

  11. The dollar amount invested by each VC was scarcely populated in the data set. If we drop VCs with missing data our sample contains 27,234 observations, roughly a third of our original sample. To reduce the resulting sample bias, we replace missing values of amount invested by VC with the minimum dollar amount VCs prefer to invest in a PC. Results are qualitatively identical when using the variable without replacement and are available upon request.

  12. UN voting records have been used as a political relations proxy in, among others. A comprehensive list of all UN General Assembly votes from 1946 to 2008 is provided by Erik Voeten’s website (Voeten & Merdzanovic, 2009 http://dvn.iq.harvard.edu/dvn/dv/Voeten).

  13. For robustness we compile results defining “Yes” votes equal to one and “No” votes equal to 0. Results are similar and are omitted for brevity.

  14. The base specification is Public Status=Unsuccessful.

  15. Our CMLOF measure is significantly correlated with each of our six international proxies (i.e., the variable it is instrumenting). CMLOF is not highly correlated with our second stage outcome variables; for example, CMLOF and prob(Successful exit) are correlated at 3.50%, while CMLOF and Successful outcome are correlated at 3.71%.

  16. See, for example, Gompers and Lerner (1999), and Nahata (2008).

  17. We do not present PR-weighted international variables in Table 3 for brevity. Results are qualitatively identical and are available upon request.

  18. The marginal effect of CMLOF in this stage is positive. Though this may be initially surprising to some, we note that this supports the contentions of Nahata et al. (2014), who find a positive relationship between cultural distance and PC success. We also note that in untabulated results, we examine the first stage analysis with a squared CMLOF term. This analysis reveals a nonlinear (i.e., convex) relationship between CMLOF and internationalization. This nonlinear relationship allows for the possibility of a positive linear term.

  19. These numbers are extracted from the full models that are provided in the even-numbered models. The first of these numbers is calculated as the percentage increase of [exp(9.84*0.2069)−1] from the sample average of 112.18 (Table 2, Panel A).

  20. See Reeb, Sakakibara, and Mahmood (2012) for a list of techniques to address endogeneity.

  21. In unreported results, we used propensity score matching with results being consistent. Results from Abadie – Imbens matching, which corrects any bias in its matching technique, are used since common support graphs for propensity score matching (available upon request) suggest bias in the propensity score matching.

  22. These results, as well as results separated by quartiles, can be found in the online supplementary information for our unweighted and PR-weighted international proxies.

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Acknowledgements

We owe thanks to the seminar participants at the Academy of International Business Conference, the Department of Foreign Affairs, Trade and Development of the Government of Canada, the Financial Management Association, Florida State University, George Washington University Global Entrepreneurship Conference, Kobe University, the Midwest Finance Association Annual Conference, the Ontario Securities Commission, Politecnico Milano, Shanghai University of International Finance and Economics, the National University of Singapore, Southern Finance Association, the University of Ottawa, the University of Windsor, and York University.

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  1. York University – Schulich School of Business, Toronto, Ontario, Canada

    Douglas Cumming

  2. University of South Florida, Tallahassee, FL, USA

    April Knill & Kelsey Syvrud

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Correspondence to Douglas Cumming.

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Accepted by David Reeb, Area Editor, 20 October 2015. This article has been with the authors for two revisions.

Supplementary information accompanies this article on the Journal of International Business Studies website (www.palgrave-journals.com/jibs)

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APPENDIX

APPENDIX

Table A1

Table A1 Variable definitions
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Cumming, D., Knill, A. & Syvrud, K. Do international investors enhance private firm value? Evidence from venture capital. J Int Bus Stud 47, 347–373 (2016). https://doi.org/10.1057/jibs.2015.46

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