VC Board Representation and Performance of US IPOs

33 Pages Posted: 11 May 2011

See all articles by Salim Chahine

Salim Chahine

American University of Beirut - Olayan School of Business

Marc Goergen

IE Business School, IE University; European Corporate Governance Institute (ECGI)

Date Written: April/May 2011

Abstract

This paper studies the impact of five dimensions of venture capitalist (VC) power on the likelihood of the board representation of VCs 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), and 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 if there is VC board membership, which is consistent with both the grandstanding and management support hypotheses. Our results suggest that VCs improve 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

Suggested Citation

Chahine, Salim and Goergen, Marc, VC Board Representation and Performance of US IPOs (April/May 2011). Journal of Business Finance & Accounting, Vol. 38, Issue 3-4, pp. 413-445, 2011. Available at SSRN: https://ssrn.com/abstract=1838045 or http://dx.doi.org/10.1111/j.1468-5957.2011.02240.x

Salim Chahine (Contact Author)

American University of Beirut - Olayan School of Business ( email )

Bliss Street
Beirut 1107 2020
Lebanon
961-1-374-374 (Phone)

Marc Goergen

IE Business School, IE University ( email )

Finance Department
Maria de Molina, 12
Madrid, 28006
Spain

HOME PAGE: http://www.ie.edu/business-school/faculty-and-research/faculty/marc-goergen/

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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