VC Board Representation and IPO Performance
56 Pages Posted: 5 Apr 2010
Date Written: March 30, 2010
This paper studies the impact of five dimensions of venture capitalist (VC) power on the likelihood of VC board representation in their portfolio firms at the initial public offering (IPO) as well as the effect of the latter on IPO performance. The dimensions of VC power are based on Finkelstein’s (1992) four dimensions of power which are ownership power, structural power (i.e. the VC’s rank within the firm’s financial hierarchy), expert power (i.e. VC industry specialization), prestige power (i.e. the number of IPOs the VC has been involved with so far). We add controlling power (i.e. how pivotal the VC is to the voted decision) to these four dimensions. We find that all five dimensions of power have a significantly positive impact on the likelihood of VC board membership. While controlling for the possible endogeneity of the latter, underpricing and the IPO premium are higher when there is VC board membership, which is consistent with both the grandstanding and management support hypotheses. Our results suggest that VCs have a real impact on IPO performance and that they do not just maintain a strong presence in better performing companies after the IPO.
Keywords: Underpricing, IPO premium, venture capital, voting power, board membership, chief executive officers
JEL Classification: G24
Suggested Citation: Suggested Citation