This paper documents an anomaly in privately-placed stock returns in China and provides an explanation based on deliberate interest transfers. Using a sample of private investments in public equity (PIPEs) with lock-up periods ending between 2007 and 2015, we find that stocks with price inversion (unlock-date price lower than the issuing price) generate higher short-term returns post lock-up period than other stocks, and the greater the degree of price inversion, the better the short-term returns. This anomaly cannot be explained by the effects of price reversal, investors' under-reaction to companies' prospects, or improved governance after PIPEs. Rather, it reflects the interests transferred by issuing firms to participating investors via means including aggressive earnings management and dividend increase, given the unique regulations on PIPEs in China. Interest transfer is particularly pronounced if local investors participate in a PIPE, but sound corporate governance can restrain it.

This paper studies bargaining power allocation and stable matching between venture capitalists and entrepreneurs with double-sided moral hazard in venture capital markets. We find that the optimal bargaining power allocation is determined by the output elasticities of effort by the two parties; the higher the output elasticity for one's effort, the greater her bargaining power. We show that efficient and stable matching follows the principle of positive assortative matching, suggesting that strong entrepreneurs/VCs match with strong partners, and weak ones match with weak counterparts. Using a large sample from the Chinese venture capital market, we empirically confirm that entrepreneurs and VCs with similar standing in their peer groups are more likely to match.