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| Risk Capital and Corporate Misconduct Governance: A Network Perspective Based on Syndicated Investments |
| MENG Qingbin, ZHAO Yinghan, QU Xiaoyu
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Business School, Renmin University of China;
School of Management, Xiamen University |
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Abstract Corporate violations undermine investor confidence, distort resource allocation, and ultimately erode the healthy functioning of capital markets. Venture capital (VC), as both a long-term companion and an external monitor of entrepreneurial firms, plays a crucial role in restraining opportunistic behavior and promoting compliance. In the context of China, where informal institutions are deeply ingrained in economic activities, examining the governance effects of syndicated investment networks is particularly significant. A syndicated investment network refers to a relational structure formed when multiple VC institutions, driven by motives of risk sharing and value co-creation, jointly invest in the same target firm. Compared with single-investor arrangements, syndication enables VCs to leverage information sharing and reputation-based constraints, thereby enhancing governance effectiveness, with central VCs exerting especially strong influence.
Using a sample of Chinese A-share listed firms from 2007 to 2022, we employ the partially observable binary probit model to jointly estimate firms' probability of corporate violations and the likelihood of regulatory detection, thus providing a more comprehensive assessment of the governance role of syndication network centrality. Empirical results demonstrate that higher syndication network centrality significantly reduces the likelihood of corporate violations while simultaneously increasing the probability of detection. These effects remain robust after multiple sensitivity checks. The mechanisms at work are twofold: first, the information channel, whereby central VCs facilitate the flow of information and alleviate information asymmetry across firms; second, the governance channel, whereby central VCs, often acting as lead investors, exert stronger monitoring pressure through ongoing oversight, reputation spillovers, and exit threats.
Further analyses reveal that syndication network centrality exerts significant governance effects on both disclosure-related violations and operational violations: it reduces firms' inclination to engage in such practices and increases the probability that violations will be uncovered. However, centrality does not significantly constrain misconduct committed by top executives, reflecting the persistent challenges of addressing leadership-level opportunism. Moreover, higher syndication centrality mitigates the severity of misconduct when it does occur and shortens the time between violation and regulatory detection, highlighting its deterrent effect. Importantly, we find that these governance effects dissipate when syndication networks fracture, such as when central VCs exit. The withdrawal of such investors not only raises the probability of misconduct but also reduces the likelihood of timely detection.
Theoretically, this study enriches the literature on corporate violations by introducing the role of syndication networks into the broader framework of external governance mechanisms complementing prior research that has primarily focused on independent directors, media exposure, and short-selling mechanisms in constraining misconduct. By contrast, we highlight the embeddedness of venture capital within syndication structures and quantify its governance function, thereby extending the understanding of how financial intermediaries contribute to corporate compliance. Empirically, our findings provide robust evidence on the disciplinary role of venture capital in emerging markets and underscore the importance of network centrality as a key governance factor. Practically, our results offer valuable insights for policymakers and regulators: strengthening institutional arrangements that foster sustained VC participation in syndication networks may help curb corporate violations, enhance detection, and contribute to the modernization of capital market governance.
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Received: 20 March 2025
Published: 05 December 2025
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