Insider Reputation and Selling Decisions: The Unwinding of Venture Capital Investments During Equity IPOs

Abstract

Using data on selling by venture capitalists during the IPOs of their portfolio companies, we examine the relation between insider selling decisions and reputation. We hypothesize that, in deciding whether to sell, venture capitalists balance the costs of continued entrepreneurial involvement against the adverse reaction to insider selling, and that they facilitate unwinding of investment positions by developing reputations for not selling overpriced shares. Evidence on the timing of IPOs and selling decisions of venture capitalists confirms the importance of reputation as a determinant of the organization of the venture capital market and as a factor affecting insider selling decisions.