Venture Capital and Risk Management: Evidence from Initial Public Offerings
Journal of Managerial Issues, Volume XXV, Number 3, Fall 2013
22 Pages Posted: 20 Feb 2014
Date Written: November 30, 2013
This study analyzes a sample of initial public offerings (IPOs) to examine the sources of firm-specific risk associated with investment by venture capitalists. The results indicate that IPO backing by venture capitalists is associated with risk factors related to operating profit margins and ongoing sales generation, but not operational financing. The results also indicate that venture-backed IPOs are associated with greater reductions in firm-specific risk over the course of a year that includes the date of the IPO. In sum, the findings suggest venture capitalists are willing to accept higher levels of risk in those instances where they might have an advantage in terms of managerial skill or are able to reduce firm-specific risk subsequent to investment in order to maximize returns when they cash out. The study also makes use of proxies that are representative of the ex-ante nature of firm-specific risk at the time of a new issue.
Keywords: venture capital, risk management, prospectus risk factors, intial public offering
JEL Classification: M10, M13, N20, D80, D81
Suggested Citation: Suggested Citation