Striving to improve investment efficiency among Chinese firms: does the role of venture capital matter?

Purpose This study aims to investigate the impact of venture capital (VC) involvement on investment efficiency (IE) and its potential action mechanisms from the perspective of financial resource allocation. Design/methodology/approach Using data of Chinese firms between 2008 and 2020, and the propensity score matching-difference in differences method, the authors investigate the relationship between VC and IE. Findings The results show that VC involvement significantly promotes IE, and the effect exhibits an inverted U-shape dynamic over time. The authors find two mechanisms through which VC promotes IE: alleviating financing constraints and improving corporate governance. Supplementary tests indicate that VC institutions with high reputations play a significant role in enhancing IE; the promotion effect is more pronounced for firms in non-high-tech industries, firms facing higher industrial competition and firms located in areas with better property rights protection systems. Originality/value This study provides several original contributions. First, based on principal-agent and financing constraint theories, this study enhances the literature by revealing how VC drives the IE of newly public firms in China. Second, to the best of the authors' knowledge, this is the first attempt to identify the mechanisms between VC and IE; Third, from an empirical perspective, besides discussing the average and dynamic effect of VC on IE, this study also explores the impact of the interaction between VC and market competition and property rights protection on IE.