Market Capacity, Information Exchange and Imperfect Matching: Evidence from the Chinese Venture Capital Market
| Published date | 01 October 2023 |
| Author | Hui Fu,Yawei Qi,Yunbi An,Minjie Zhang |
| Date | 01 October 2023 |
| DOI | http://doi.org/10.1111/1467-8551.12669 |
British Journal of Management, Vol. 34, 1869–1894 (2023)
DOI: 10.1111/1467-8551.12669
Market Capacity, Information Exchange
and Imperfect Matching: Evidence from the
Chinese Venture Capital Market
Hui Fu,1Yaw ei Qi , 2Yunbi An3and Minjie Zhang3
1School of Business, Jiangnan University, Wuxi, Jiangsu, 214122, China, 2School of Information Management,
Jiangxi University of Finance and Economics, Nanchang, Jiangxi, 330032, China, and 3Odette School of
Business, University of Windsor, Windsor, Ontario, N9B 3P4, Canada
Corresponding author email: qiyawei@jxufe.edu.cn
This paper examines imperfect matching between venture capital (VC) rms and en-
trepreneurial rms in the VC market. We nd an anomaly of imperfect matching evi-
denced by an inection point of the matching structure in the Chinese VC market. When
the market capacity is within a specic critical range,the greater the market capacity, the
greater the degree of matching; when the market capacity exceedsa certain critical point,
the greater the marketcapacity, the smaller the degree of matching. We further show that
the degree of efcient information exchange in the VCmarket provides a powerful expla-
nation for this anomaly.Our ndings advance the research on matching structures at the
market level, explain imperfect matching in the Chinese VC market from a unique angle
and provide valuable policy implications for the developmentof VC markets.
Introduction
Matching between two parties represents a salient
topic in economics and management studies
(Hateld and Milgrom, 2005; Lauermann, 2013;
Legros and Newman, 2007; Mitsuhashi and Min,
2016). Many prior studies investigate how to ac-
complish a perfect matching, or whether there
is a market equilibrium for the matching pro-
cess. Gale and Shapley (1962) provide a solution
for stable matching between males and females
in a model with complete information. Fu, Yang
and An (2019a) develop a matching model with
double-sided moral hazard in the venture capi-
tal (VC) market by focusing on how VCs and en-
trepreneurial rms select each other to achieve a
state of stable matching. Their ndings conrm the
existence of market equilibrium of perfect match-
ing in the VC marketwith ex-ante symmetric infor-
mation.
This paper intends to examine matching imper-
fections in real-world VC markets. Our research is
motivated by the fact that the ex-ante information
is asymmetric between VCs and entrepreneurial
rms in the real world. Thus, the matching struc-
ture in the VC marketcan depend greatly on many
factors that may be irrelevantin the perfect match-
ing model of Fu, Yang and An (2019a). One such
factor is market capacity, which is dened as the
number of pairs that have successfully matched
in a market. It is noteworthy that market capac-
ity is a dynamic phenomenon and subject to ex-
ternal shocks out of the discretionary control of
both suppliers and demanders of equity capital.1
While in an ideal matching model, market capac-
ity is an utterly exogenous and independent vari-
able that does not affect matching efciency (Fu,
Yang and An, 2019a), in the real world, it may af-
fect the magnitude of information asymmetry be-
tween groups and thus matching efciency. In this
paper, we are particularly interested in exploring
1We thank one of the anonymous referees for insightful
comments regarding the market capacity concept.
© 2022 British Academy of Management.
1870 Fu et al.
whether a change in market capacity leads to im-
perfect matching and how it affects the matching
structure in the VC market. Our logic is that given
the unique features of the VC market (Nahata,
2008; Tumasjan, Braun and Stolz, 2021), changes
in market capacity will affect the degree of infor-
mation asymmetry,which in turn will lead to inef-
cient matching in the market. To explain this mar-
ket anomaly in consideration of market frictions,
we also propose a new measure of the efciency
of information exchangeas an indicatorof ex-ante
information asymmetry.
In this paper, we focus on the emerging Chi-
nese VC market. The Chinese VC market only be-
gan to develop around 2000, but it has expanded
rapidly in the past 20 years. Now, it is the second-
largest VC market in the world in terms of in-
vestments. The most active players in the Chinese
VC market are government-backed VCs, domestic
VCs and VCs from overseas. In 2018, more than
29.4% of global VC investments went to Chinese
entrepreneurial rms (Suchard, Humphery-Jenner
and Cao, 2021). Our sample includes 6026 rst-
round VC investments over the 18 years from2002
to 2019, which coversthe three most active Chinese
local VC markets: Beijing, Shanghai and Shen-
zhen. We nd that the degree of matching exhibits
an inverted U-shaped anomaly in the Chinese VC
market. To understand the underlying reason for
this anomaly, we show that the degree of efcient
information exchange in the Chinese VC market
initially increases and then decreases with increas-
ing market capacity.Further, the degree of efcient
information exchange is positively related to the
degree of matching. Thus, inefcient information
exchange provides a powerful explanation for the
anomaly of imperfect matching in the Chinese VC
market.
Our paper contributes to various facets of the
VC and matching literature. First, since there are
discrepancies and contradictions between an ideal
theoretical model and a real market, we focus on
imperfect matching due to ex-ante information
asymmetries in real market situations. We nd ev-
idence of imperfect matching in the Chinese VC
market and document the mechanisms that ex-
plain this anomaly. This is different from prior lit-
erature that focuses mainly on perfectly matched
market equilibria (Fu, Yang and An, 2019a; Gale
and Shapley, 1962) and complements, revises and
extends the ndings of theoretical models. Our
ndings provide new insight into the causes of
VC market mismatches. Second, our paper ex-
tends and adds to prior literature that investigates
the matching problem either in the context of ex-
ante and ex-post complete information symmetry
(Gale and Shapley, 1962; Sørensen, 2007) or in
the context of ex-ante information symmetry and
ex-post double-sided moral hazard only (Ewens,
Gorbenko and Korteweg, 2019; Fu, Yang and An,
2019a; Hong, Serfes and Thiele, 2020). Our re-
search advances our understanding of matching in
a context that is more aligned with the marketreal-
ity of ex-ante information asymmetry and ex-post
double-sided moral hazard. Third, we examineim-
perfect matching at the market level, which repre-
sents a new perspective on matchingresearch in the
VC market.This is in contrast with prior literature
that focuses on the degree of perfect matching at
the deal level (Fu, Yang and An, 2019a; Gale and
Shapley, 1962).
The paper is organized as follows. ‘Literaturere-
view and hypothesis development’ reviews the re-
lated literature and develops the hypotheses. ‘Re-
search design’ describes our researchdesign. ‘Data
and summary statistics of variables’ presents the
data and summary statistics. ‘Empirical results’
analyses the empirical results,with further analysis
covered in the section ‘Further analyses’. ‘Conclu-
sions’ concludes the paper.
Literature review and hypothesis
development
Literature review
Prior literature on matching generally views ex-
ante information as symmetric common knowl-
edge in the context of complete information. One
classical study is Gale and Shapley (1962), which
examines whether there is a stable(partner) match-
ing strategy in the relationship between males and
females. The Gale–Shapley strategy suits the one-
to-one matching problembetween individuals with
heterogeneous idiosyncrasies under the condition
of perfect information. Subsequently, many stud-
ies in this area further explore stable matching is-
sues from three perspectives. The rst perspective
investigates whether the matching outcome fol-
lows positive or negativeassortative matching (Au-
mann, 1985; Legros and Newman, 2007). The sec-
ond perspective analyses the existence and unique-
ness of bilateral and stable matching from the
point of view of the properties satised by the
© 2022 British Academy of Management.
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