Lost in the Noise: How IPO Suspensions Distract Venture Capitalists From Monitoring Portfolio Firms

We examine how regulatory suspensions of initial public offerings (IPOs) affect venture capitalists’ (VCs’) post‐IPO monitoring of portfolio firms in China. Using a difference‐in‐differences design that exploits three major IPO suspension episodes as quasi‐natural experiments, we provide causal evidence that these shocks divert VCs’ attention and are followed by increased tunneling by controlling shareholders in VC‐backed firms. Specifically, we document significant increases in related‐party intercorporate loans and in the incidence of capital occupation violations after IPO suspension episodes. Evidence from VC interviews, surveys, and board‐meeting data further indicates that IPO suspensions reduce VCs’ oversight of portfolio firms. The effects are stronger when VCs are more exposed to IPO‐related distractions, when VC monitoring would otherwise be more effective, and when controlling shareholders have stronger incentives to tunnel, and they are attenuated when alternative governance mechanisms are present. Overall, our findings highlight the post‐IPO governance role of VCs and reveal an unintended governance cost of IPO suspension policies.