How does the Reputation of Venture Capital Impact on Financial Constraints?

This article examines the effect that venture capitals’ reputation has on financial constraints with two-way fixed-effect models and Arellano-Bond dynamic panel GMM model. It is found that firms backed by venture capital with high reputation are confronted with lower financial constraints. Besides, venture capital reputation functions as a signal that can help investors to evaluate firms by lessening the effect of asymmetric information. More specifically, venture capital reputation can lower the chance of the adverse selection, but the impact that venture capital reputation has on agency costs has not been verified. Furthermore, venture capital with high reputation can offer available financing sources for invested-firms and reduce their invisible financing cost, which they pay for getting contact with potential investors. Based on these findings, there are three suggestions for authorities to loosen financial constraints and address financial issues faced by SEMs and non-state-owned firms.