Venture-backed Initial Public Offerings Research Articles

On the role of inexperienced venture capitalists in taking companies public

We use venture-backed initial public offerings (IPOs) to identify and examine the comparative advantage of inexperienced venture capitalists. We argue that, vis-a-vis more established counterparts, younger venture capital firms have a comparative advantage at producing soft information about relatively opaque start-up companies due to their organizational structure. We then quantify an outcome—IPO initial return—from the matching of venture capitalists and start-up companies that demonstrates how this comparative advantage arises. Our findings thus reveal an important aspect of how inexperienced venture capitalists support start-up companies.

The performance of venture-backed IPOs in Europe

The importance of venture capitalists (VCs) to the success of start-up firms and for economic growth has been well documented in the US. This study investigates the performance of European venture-backed initial public offerings (IPOs) during the period from 1996 to 2010 which includes two stock market cycles and IPO waves. We focus on underpricing (UP) and long-run performance and differentiate between various stock exchanges and firm characteristics. Our findings indicate that venture-backed IPOs generate positive returns for some time after the IPO. This result holds not only for investments in the primary market but also for investments made later on in the secondary market. During the new economy period (1996 to 2003) IPOs have higher UP and first year returns compared to IPOs during the second stock market cycle (2003 to 2010), but in the long run there are no significant performance differences. We also find higher abnormal returns for venture-backed firms that went public on main markets and for larger VC-backed firms for nearly three years after going public. Most importantly, the group of venture-backed IPOs consistently and significantly outperforms a large group of non-venture-backed IPOs. Overall, we provide empirical evidence that venture-backed IPOs in Europe generate positive and superior returns to investors.

Venture capital and risk management: evidence from initial public offerings

In this study we analyze a sample of initial public offerings (IPOs) to infer the sources of firm-specific risk associated with investment by venture capitalists. The results indicate that IPO backing by venture capitalists is associated with risk factors related to operating profit margins and ongoing sales generation, but not operational financing. The results also indicate that venture-backed IPOs are associated with greater reductions in firm-specific risk over the course of a year that includes the date of the IPO. In sum, the findings suggest venture capitalists are willing to accept higher levels of uncertainty in those instances where they have an advantage in terms of managerial skill, and are able to reduce firm-specific risk subsequent to investment in order to maximize returns when they cash out. Our study also makes use of proxies that are representative of the ex-ante nature of firm-specific risk at the time of a new issue.

The effects of R&D, venture capital, and technology on the underpricing of IPOs in Taiwan

Information asymmetry and value uncertainty causes high -research and development (R&D) or high-tech Initial Public Offerings (IPOs) to become underpriced. Venture capital can serve as a moderator to mitigate the information asymmetry and value uncertainty to reduce IPO underpricing. High-tech industries significantly contribute to Taiwan’s economic growth. With the unique Taiwan data, we find that venture-backed IPOs are less underpriced. More importantly, IPO underpricing due to technology decreases with the use of venture capital and decreases with the interaction between R&D expenditure and technology. Technology requirement reduces the underpricing of high-R&D IPOs. Accordingly, R&D spending reduces the underpricing of high-tech IPOs.

On the Matching of Companies and Their Financial Intermediaries: Evidence from Venture Capital

We use venture-backed initial public offerings (IPOs) to identify and examine the comparative advantage of inexperienced venture capitalists. We argue that, vis-a-vis more established counterparts, younger venture capital firms have a comparative advantage at producing soft information about relatively opaque start-up companies due to their organizational structure. We then quantify an outcome — IPO initial return — from the matching of venture capitalists and start-up companies that demonstrates how this comparative advantage arises. Our findings thus reveal an important aspect of how inexperienced venture capitalists support start-up companies.

Long-term Performance of New Equity Issuers, Venture Capital and Reputation of Investment Bankers

This study investigates the potential effects of investment-banking reputation and venture capital on the long-term performance of initial public offerings (IPOs) simultaneously. Our findings do not support the view that IPOs perform differently compared with other firms, with the only exception of venture-backed IPOs. We show that venture-backed IPOs are associated with long-term gains when we account for investment bankers’ reputation, size and book-to-market effects. Zero investment portfolios, based on combinations of underwriter's reputation and venture capital involvement's in IPOs, provide additional evidence in support of the view that venture-backed IPOs, regardless of the reputation of underwriters, are associated with significant post-issue gains. Our results also indicate that the reputation of investment bankers matters only in the absence of venture capital.

Underpricing of Venture and Non Venture Capital Ipos: An Empirical Investigation

In this paper we examine the premarket underpricing phenomenon within a group of venture-backed and a group of non venture-backed initial public offerings (IPOs) using a stochastic frontier approach. Consistent with previous research, we find that venture-backed IPOs are managed by more reputable underwriters and are generally associated with less underwriter compensation. However, unlike other papers in the literature, we find that the initial day returns of venture-backed IPOs are, on average, higher than the non venture-backed group. We also observe a significantly higher degree of pre-market pricing inefficiency in the initial offer price of venture-backed IPOs. Further, our results show that a significant portion of the initial day returns is due to deliberate underpricing in the premarket. We also observe that for both venture and non-venture issuers, there is a positive relationship between deliberate underpricing and the probability that underwriters provide support for the issue. This evidence is consistent with the notion that underwriters deliberately underprice the offering to reduce costs of price stabilization in the after-market.