VC Valuation, Partial Adjustment, and Underpricing: Behavioral Bias or Information Production?

Abstract

Using a sample of venture capital-backed firms going public, we analyze the role played by perceived valuation changes on IPO underpricing. We consider the full trajectory of perceived valuation changes in a firm’s value from its last VC round, to IPO filing, and ultimately to IPO price. We find that perceived valuation change from the last pre-IPO venture capital round to the time of IPO affects the IPO underpricing in a non-linear way. Further analysis indicates that information based theories, not behavioral biases, explain this non-linear result. We also find that the previously documented partial adjustment effect and its non-linear impact on IPO underpricing are related to the trajectory of the perceived valuation changes. Nevertheless, the lack of direct effect of behavioral bias on IPO underpricing stands in stark contrast to prior evidence that shows importance of behavioral biases in settings with many sophisticated parties.

Keywords: Initial public offering, IPO underpricing, prospect theory, anchoring, asymmetric information

JEL Classification: G32