The collusion behavior of venture capitalists and entrepreneurs based on “guanxi”: evidence from China

The role of venture capital in promoting entrepreneurship and funding innovation cannot be underestimated. However, it is important to acknowledge noteworthy concerns associated with collusive behavior in the venture capital process. “Guanxi” is a relatively intimate and closed social relationship, which can impact venture capital through trust and social obligations. Drawing on the theories of unethical pro-relational behavior and social networks, using data from GEM-listed companies supported by venture capital from 2009 to 2021, this research investigates the phenomenon of collusion behavior between venture capitalists and entrepreneurs, with a particular focus on the influence of “guanxi”. The research finds that the presence of “guanxi” between venture capitalists and entrepreneurs tends to facilitate collusive behavior. Specifically, “guanxi” tends to increase entrepreneurial self-interest behavior, and venture capitalists’ returns, infringe upon minority shareholders’ interests, and increase corporate operational risk. Moreover, the study further explores the moderator effect of equity incentives on such collusion behavior. This research not only enriches the theoretical framework of the relationship between “guanxi” and venture capital activities but also provides insight into the ethical implications associated with “guanxi”, contributing to the broader literature on social relationships and unethical behavior.