Venture Capitalist Involvement and the Long-Run Performance of IPOs

Abstract

The long-run underperformance of initial public offerings (IPOs) is a well documented anomaly. Recent research has shown that venture-backed IPOs marginally outperform non venture-backed IPOs and posits that venture capitalists (VCs) may add value through a variety of methods. We investigate the relation between the degree of involvement by VCs and the long-run performance of IPOs. We find a positive relationship between the proportion of monitoring directors (VC and independent directors) and long-run performance, evidence consistent with VCs shaping the board to increase monitoring. Further, it appears that VC-backed firms are able to reduce asymmetric information through attracting analysts and large shareholders thus improving long-run performance. Our results suggest that the underperformance of IPOs may be driven in part by those firms with none or low degrees of VC involvement. <b>TOPICS:</b>Private equity, portfolio construction, in portfolio management, performance measurement