Venture capital (VC) participation in private placements may support innovation, but high subscription discounts can distort investor incentives and discourage long-term innovation. This study aims to examine how subscription discounts shape the innovation effects of VC participation.
Using China A-share listed firms from 2006 to 2023, this study examines the mechanisms and economic consequences of VC participation and subscription discounts in private placements.
VC participation in discounted private placements significantly weakens firms’ innovation capabilities. This effect operates through reduced R&D investment and increased inefficient investment and is more pronounced under greater information asymmetry. It is also stronger for mature and industry-focused VC investors, firms located in regions with greater capital concentration, growth-stage firms and financially constrained firms. Further analyses indicate that VC investors subscribing at higher discounts exhibit a stronger financial orientation. Under low-discount conditions, better innovation performance is associated with a lower likelihood of subsequent VC divestment, whereas this relationship disappears under high-discount conditions. Discounted subscriptions by VC investors also impair firms’ long-term stock market performance.
This study extends the VC short-termism literature by identifying entry-stage pricing as a determinant of VC incentives and corporate innovation.
