The venture capital certification role in R&D: Evidence from IPO underpricing in Korea

Abstract

During the last two decades, a number of studies have documented how initial public offerings (IPOs) of equity often exhibit underpricing; such studies have also attempted to identify the reasons for this underpricing phenomenon. Utilizing information asymmetry theory and signaling theory, many studies have demonstrated that both venture capital investment and research and development (R&D) can be important factors that influence IPO underpricing. However, these studies have not demonstrated how venture capital might function as a moderating force between R&D investment and the underpricing of IPOs. This study investigates the relationship between R&D investment and the underpricing of IPOs to clarify the moderating effect of venture capital investment by using IPO data from South Korean high tech firms. The study draws samples from 591 IPO companies that registered with Korea Securities Dealers Automated Quotation (KOSDAQ) between 2001 and 2008. The empirical results indicate that R&D leads to significantly higher underpricing of IPOs. The findings further reveal that the participation of venture capitalists (VCs) has alleviative effects on the underpricing of technology-based IPOs due to VCs' certification role in the uncertainty of R&D activity; in addition, the R&D certification effect of VC is stronger for more reputable VCs.