Currying Favor with Top Venture Capital Firms: The Role of IPO Underpricing and All-Star Coverage

36 Pages Posted: 21 Feb 2011 Last revised: 12 Sep 2018

See all articles by Daniel Bradley

Daniel Bradley

University of South Florida

Incheol Kim

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship

Laurie Krigman

Babson College

Date Written: June 16, 2011

Abstract

We explore the central role that top venture capitalists play in the IPO underwriting market. We argue that underwriters curry favor with Top VCs, not necessarily issuing firms, because Top VCs have the ability to direct the most business in a repeated game sense to banks that treat them well. The relationship between VC firms and investment banks extends through time and therefore incentives extend beyond the current IPO. Consistent with this view, we find that Top VC-backed IPOs are more likely to get all-star coverage regardless of analyst bank affiliation. In turn, banks providing all-star coverage are more likely to be chosen to lead the next VC-backed deal. We find a positive relationship between underpricing and all-star coverage for Top VCs, but not non-Top VCs. Top VCs tolerate higher levels of underpricing because the information momentum generated by underpricing allows them to cash out at higher prices when the lockup expires.

Keywords: Initial public offering, all-star analyst coverage, venture capital, underpricing

JEL Classification: G14, G24

Suggested Citation

Bradley, Daniel and Kim, Incheol and Krigman, Laurie, Currying Favor with Top Venture Capital Firms: The Role of IPO Underpricing and All-Star Coverage (June 16, 2011). Paris December 2012 Finance Meeting EUROFIDAI-AFFI Paper, Available at SSRN: https://ssrn.com/abstract=1763905 or http://dx.doi.org/10.2139/ssrn.1763905

Daniel Bradley (Contact Author)

University of South Florida ( email )

Tampa, FL 33620
United States

Incheol Kim

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship ( email )

1201 W University Dr
Edinburg, TX 78539
United States

Laurie Krigman

Babson College ( email )

Finance Division
321 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4246 (Phone)

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