Informational Externalities of Initial Public Offerings: Does Venture Capital Backing Matter?

35 Pages Posted: 14 May 2009

See all articles by Carmen Cotei

Carmen Cotei

University of Hartford - Department of Economics, Finance & Insurance

Joseph B. Farhat

Central Connecticut State University - Department of Finance

Date Written: May 14, 2009

Abstract

We examine the role of venture capital backing on informational externalities generated by IPO firms. Theoretical models predict that going public firms generate positive externalities creating a spillover effect for other firms to go public. In this paper, we posit that venture backed IPOs convey positive information about industry and this information is transferred to rival firms. We also hypothesize that intra-industry information transfer varies with rivals’ characteristics and IPO price revisions generate additional information that affects rivals’ valuation. The results show that rivals have positive valuation effects in response to venture backed IPOs and no significant reaction in response to non-venture backed IPOs. We find evidence that the effect on rival firms is stronger if they operate in highly concentrated industries and have high growth opportunities. The larger the relative size of IPO firm, the higher the magnitude of rivals’ valuation effects. Negative information revealed in the form of downward price revisions adversely affects rival firms’ valuation.

Keywords: intra-industry information transfer, initial public offerings, venture capital backing, price revisions

JEL Classification: G24

Suggested Citation

Cotei, Carmen and Farhat, Joseph, Informational Externalities of Initial Public Offerings: Does Venture Capital Backing Matter? (May 14, 2009). Available at SSRN: https://ssrn.com/abstract=1404606 or http://dx.doi.org/10.2139/ssrn.1404606

Carmen Cotei (Contact Author)

University of Hartford - Department of Economics, Finance & Insurance ( email )

United States

Joseph Farhat

Central Connecticut State University - Department of Finance ( email )

1615 Stanley Street
New Britian, CT 06050
United States

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