Financial Distress Risk in Initial Public Offerings: How Much Do Venture Capitalists Matter?
47 Pages Posted: 27 Jan 2016 Last revised: 23 Sep 2016
Date Written: September 18, 2016
Using a sample of 1,593 US firms that go public between 1990 and 2007, we find that VC-backed IPOs experience less financial distress risk post-offering than do comparable non-VC-backed IPOs. After controlling for endogeneity, we find this is related to the screening done by VC-investors, who select firms with lower risk of financial distress and by VCs reducing risks when they finance portfolio firms. We find companies backed by more reputable VCs exhibit higher levels of financial distress risk even when they show superior operating performance, due their highly levered capital structure and investment in relatively illiquid assets.
Keywords: Venture capital; Financial distress risk; Bankruptcy; IPOs; Reputation
JEL Classification: G23, G24, G32, G33
Suggested Citation: Suggested Citation