The Impact of Venture Capital Investment on the Performance of Peer‐to‐Peer Lending Platforms: Evidence from China

• Date: 01 October 2019
• Author: Dingwei Gu,Tian Lu,Chenghong Zhang,Pinliang Luo
• Published date: 01 October 2019
• DOI: http://doi.org/10.1111/ajfs.12276

The Impact of Venture Capital Investment

on the Performance of Peer-to-Peer Lending

Platforms: Evidence from China*

Dingwei Gu

School of Economics and School of Management, Fudan University, China

Tian Lu**

School of Management, Fudan University, China

Pinliang Luo

School of Management, Fudan University, China

Chenghong Zhang

School of Management, Fudan University, China

Received 19 April 2018; Accepted 30 June 2019

Abstract

The Chinese peer-to-peer (P2P) lending market is expanding quickly but has a relatively poor

level of operation. Using panel-structured data from a leading P2P lending portal in China,

we investigate the effects of venture capital (VC) investment on the performance of P2P lend-

ing platforms. Specifically, we identify a short-term signaling effect and a long-term gover-

nance effect of VC investment on platform performance in terms of transaction volume, and

numbers of lenders and borrowers. However, we only find a decrease in average interest rates

after venture capitalists’ (VCs’) entry in the long run. Moreover, we verify both the effects of

investment from listed VCs, but no signaling effect and a weak governance effect of invest-

ment from non-listed VCs. Our analysis provides new insights into how VC investment

improves the performance of target firms.

Keywords China; Governance; P2P lending; Performance; Signaling; Venture capital

JEL Classification: G2, G3

*This work was supported by the National Natural Science Foundation of China under

Grants #71572045, #91546104, #71872050, #71531006, and #71490721.

**Corresponding author: School of Management, Fudan University, No. 670 Guoshun Road,

Yangpu District, Shanghai 200433, China. Tel: +86-21-2501-1233, Fax: +86-21-6564-4783,

email: lutian@fudan.edu.cn.

Asia-Pacific Journal of Financial Studies (2019) 48, 640–665 doi:10.1111/ajfs.12276

640 ©2019 Korean Securities Association

1. Introduction

Online peer-to-peer (P2P) lending has emerged as an appealing financing channel

(Wei and Lin, 2016). The P2P lending platform is essentially an online credit market

where borrowers and lenders conduct loan business without the involvement of tradi-

tional financial institutions (Collier and Hampshire, 2010). The Chinese P2P lending

market has grown significantly. In March 2018 it was reported that the transaction

volume of the Chinese P2P lending market was as high as CNY191.57 bn (approxi-

mately US$29.47 bn). However, 4198 out of 6081 P2P lending platforms faced daily

operational problems or were bankrupt by the end of March 2018.

1

Like the P2P lending business in developed countries or in regions such as the

United States and Europe, the Chinese P2P lending business is usually a web-based

platform where borrowers apply for loans that are then sold to investors on the site.

The platform charges a commission and profits from the difference between interest

rates charged to the borrower and paid to the lender (P2P Research Group, 2015).

However, unlike Zopa in the United Kingdom, and the Prosper and LendingClub

in the United States, Chinese P2P lending platforms offer investors “guarantees,”

often of both principal and interest, backed by the platform itself, a financial insti-

tution, or a guarantee company about which the investors know little or nothing

(P2P Research Group, 2015). This is the main reason why Chinese P2P lending

investors face a high risk not only from borrowers, but also from platform bank-

ruptcy. Moreover, regarding the pricing mechanism, while platforms in other coun-

tries usually have auction and/or posted-price mechanisms (Wei and Lin, 2016), in

most Chinese platforms, investors cannot bid for interest rates. That is, the price is

often posted by the platform rather than auctioned by the investors.

The rapid growth and expansion of the P2P market calls for effective gover-

nance of P2P platforms. The large market scale and quick expansion of P2P lending

in China has attracted the attention of venture capitalists (VCs). Many domestic

VCs have entered the Chinese P2P lending market and backed their target plat-

forms. According to our manually collected data, the size of VC investment in

China reached over CNY10 bn up to the beginning of 2017 (in our sample period),

and approximately 12% of P2P lending platforms among the more than 600 well-

developed platforms whose daily transaction data are published by the Chinese P2P

lending portal p2peye (www.p2peye.com) have acquired VC investment.

2

VC

investment is thought to be one of the most effective ways to finance young, high-

1

Data source: http://shuju.wdzj.com/industry-list.html.

2

Prosper.com and LendingClub.com, two leading P2P lending platforms in the United States,

and Zopa.com in the United Kingdom, have also announced that they have acquired invest-

ment from the outside market. https://www.franciscopartners.com/news/prosper-marketplace-

announces-70-million-investment-round-led-by-francisco-partners, https://www.vcpost.com/ar

ticles/23418/20140417/lending-club-raises-115m-in-debt-and-equity-buys-financing-company-

springstone-financial-for-140m.htm, and http://uk.businessinsider.com/zopa-raises-32-million-

launch-a-bank-northzone-wadhawan-global-capital-wgc-2017-6.

Venture Capital Investment on P2P Lending

©2019 Korean Securities Association 641