Information Production within the Venture Capital Market: Implications for Economic Growth and Development
63 Pages Posted: 4 Aug 2014 Last revised: 20 Jun 2016
Date Written: January 6, 2015
I find venture capitalists' (VCs') information production activities help decrease uncertainty about the valuations of new innovations within public equity markets, resulting in price convergence within the cross-section of Initial Public Offerings (IPOs) that are backed by different classes of VCs and price convergence between VC and non-VC backed IPOs. These findings provide evidence that venture capital financing can be a component of an effective or efficient price discovery process within public equity markets, and yield positive externalities in so far as the pricing of non-VC backed IPOs are concerned. Given a decrease in valuation uncertainty within stock markets ultimately results in lower costs of capital for issuing firms, larger stock markets, and improvements in market liquidity, my findings provide evidence that VCs' information production activities are beneficial for economic growth (market size) and economic development (price discovery processes).
Keywords: Venture Capital, Initial Returns, Innovation, Underpricing, Information Asymmetry, IPO, Economic Development
JEL Classification: G24
Suggested Citation: Suggested Citation