Venture Capital Financing, Patenting, and Long-Run Performance of Private Acquisitions
46 Pages Posted: 23 Jun 2010 Last revised: 12 Jul 2010
Date Written: March 15, 2010
Our model reconciles seemingly contradictory empirical evidence on venture capital activity. Despite the venture capital-backed companies' superior long-run performance, stock markets react more negatively to their acquisitions than to other private acquisitions. Moreover, venture capital intensive industries show higher patent count, but not higher total factor productivity growth. We explain both contradictions through the venture capitalists' incentive to signal their companies' value prior to exiting. Such incentives increase their companies' investments, patenting, and performance; but inflate investment costs and acquisition prices. We generate novel testable predictions for the interaction of patent law, early-stage financing, and long-run performance of private acquisitions.
Keywords: venture capital, patenting, intellectual property rights, private acquisitions, long-run performance
JEL Classification: C70, D21, D82, G24, L20, M13, O30, O34
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