Venture Capital Share Sales and Stock Market Reaction: Evidence from Korea

This study analyzes the stock market reaction to share sale announcements made by venture capital firms (VCs) and tests the monitoring role of VCs on publicly listed companies. We hypothesize that the divestment of shares by a VC signals the termination of its monitoring function, thereby inducing a negative market response. This effect is anticipated to be more pronounced when the divesting VC possesses stronger incentives to monitor the portfolio company. This study employs the ownership stakes and board representation of VCs as proxy variables for monitoring incentives. Analyzing 298 disclosures of share sales by VCs in the KOSDAQ market from 2010 to 2022, this study finds the following. First, a statistically significant negative cumulative abnormal return is observed from the disclosure date to five days afterward. Second, univariate analyses of subsamples indicate that the negative market reaction is more pronounced when the VC holds a larger ownership stake or a board seat. Third, regression analyses controlling for firm and VC characteristics confirm a negative correlation between the VC’s monitoring incentives and post-disclosure cumulative abnormal return, providing support for the monitoring hypothesis.