The Impact of Liquidity on Stock Performance Among Venture Capital-backed Firms in India-The Impact of Liquidity on Stock Performance Among Venture Capital-backed Firms in India

Abstract

Venture capital is a financing form that has increased in popularity during the last decades. Its emergence is closely related with the development of new technology and is, as a result, often invested in innovative companies that are considered to possess high-growth potential. In return for these investments, the investors usually demand extremely high returns. Although the VC industry in developed economies has been widely researched previously, research in VC industries in emerging markets is rather limited. During a time of emergence among many developing economies, especially in terms of their VC industries, it is of increasing importance to understand how VC-backed firms in these markets develop across time, and an example of such an emerging market is India which in 2017 and 2018 generated higher GDP growths than China. An important factor as to how companies’ stock perform is their stock liquidity, a relationship that has been widely researched previously. As India continues to grow economically, it is therefore becoming more relevant to study these liquidity effects among India’s emerging high-growth firms. To do so, a sample of 60 Indian VC-backed firms, constituting the emerging market, and 60 U.S. VC-backed firms, constituting the developed economy, were obtained using data ranging between the 2007-2018. The study was conducted through comparing the liquidity effects on performance between these two groups, as well as testing whether this liquidity effect holds for Indian VC-backed firms as well. Based on the results, I find no significant evidence that Indian VC-backed firms experience any different liquidity effects than U.S. VC-backed firms, but instead, the results may indicate similar behavior among the two groups.