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How Does Policy Uncertainty Affect Venture Capital?

Author

Listed:
  • Xuan Tian
  • Yichu Wang
  • Kailei Ye

Abstract

This paper examines the effect of policy uncertainty on venture capital (VC) investment. Relying on plausibly exogenous variation in policy uncertainty caused by closely contested U.S. gubernatorial elections, we find that policy uncertainty negatively affects VC investment. The effect is more pronounced if VC investment is subject to higher illiquidity. However, some distinctive features of VCs (strategic motives, intensive post-investment monitoring, and preferences for early-stage and high-tech ventures) mitigate the effect of policy uncertainty, distinguishing the effect of policy uncertainty on VC investments (in private markets) from that in public markets. Our findings shed new light on the real effects of policy uncertainty in private markets. (JEL G24, D81, M13)

Suggested Citation

  • Xuan Tian & Yichu Wang & Kailei Ye, 2025. "How Does Policy Uncertainty Affect Venture Capital?," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 14(2), pages 439-481.
    • Handle: RePEc:oup:rcorpf:v:14:y:2025:i:2:p:439-481.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfad023
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    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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