Economic policy uncertainty and covenants in venture capital contracts

Na Ding; Panpan Feng; Jianjun Liu; Zhaoyue Ren; Xueyong Zhang

doi:10.1016/j.jbankfin.2025.107562

Journal of Banking & Finance Vol. 181 2025

Economic policy uncertainty and covenants in venture capital contracts

Na Ding¹; Panpan Feng²; Jianjun Liu^3,4; Zhaoyue Ren⁵; Xueyong Zhang¹

¹ Central University of Finance and Economics · ² Southwestern University of Finance and Economics · ³ Hunan University · ⁴ Hunan University of Finance and Economics · ⁵ Tsinghua University

Abstract

This study investigates how economic policy uncertainty (EPU) affects venture capital (VC) contract terms. Using a unique database of contracts between VCs and entrepreneurial firms in China, we provide evidence that EPU positively affects the presence of investor-friendly covenants in VC contracts. Our mechanism analysis shows that screening for high-quality startups and VCs’ increased bargaining power are potential channels. Furthermore, we find that including more investor-friendly covenants mitigates the negative effect of EPU on VC exit performance.

DOI: 10.1016/j.jbankfin.2025.107562
Volume: 181
Pages: 107562
Language: en
Sources: openalex crossref bibtex:phds-export.bib

Economic policy uncertainty and covenants in venture capital contracts

Abstract

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