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Venture Capital Conflicts of Interest: Evidence from Acquisitions of Venture Backed Firms

Ronald W. Masulis
Vanderbilt University - Owen Graduate School of Management; Vanderbilt University - School of Law; University of New South Wales - Australian School of Business

Rajarishi Nahata
City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

Abstract:
We analyze the effects of venture capital (VC) backing on profitability of private firm acquisitions. We find VC backing leads to significantly higher acquirer announcement returns, averaging 3 percent, even after controlling for deal characteristics and endogeneity in venture funding. This leads us to investigate whether some VCs have interests which conflict with other investors. We show that such conflicts arise from VCs having financial relationships with both acquirers and targets, corporate VCs having a dominant strategic focus, and VC funds nearing maturity experiencing pressure to liquidate. Our conclusions follow from examinations of target takeover premia and acquirer announcement returns.

Keywords: Acquisitions, M&A, Venture Capital, Conflicts of Interest, Moral Hazard

JEL Classifications: G34, G24

Accepted Paper Series

Date posted: March 29, 2007 ; Last revised: September 08, 2009

Suggested Citation

Masulis, Ronald W. and Nahata, Rajarishi, Venture Capital Conflicts of Interest: Evidence from Acquisitions of Venture Backed Firms (July 6, 2009). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: http://ssrn.com/abstract=891571

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Contact Information

Rajarishi Nahata (Contact Author) City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance ( email ) 17 Lexington Avenue New York, NY 10010 United States
Ronald W. Masulis Vanderbilt University - Owen Graduate School of Management ( email ) 401 21st Avenue South Nashville, TN 37203 United States 615-322-3687 (Phone) 615-343-7177 (Fax)
Vanderbilt University - School of Law 131 21st Avenue South Nashville, TN 37203-1181 United States
University of New South Wales - Australian School of Business ( email ) Sydney, NSW 2052 Australia