Financial Distress Risk in Initial Public Offerings: How Much Do Venture Capitalists Matter?

47 Pages Posted: 27 Jan 2016 Last revised: 23 Sep 2016

See all articles by William L. Megginson

William L. Megginson

University of Oklahoma

Antonio Meles

Second University of Naples (SUN)

Gabriele Sampagnaro

University of Naples Parthenope

Vincenzo Verdoliva

University of Naples Parthenope

Date Written: September 18, 2016

Abstract

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

Megginson, William L. and Meles, Antonio and Sampagnaro, Gabriele and Verdoliva, Vincenzo, Financial Distress Risk in Initial Public Offerings: How Much Do Venture Capitalists Matter? (September 18, 2016). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2723620 or http://dx.doi.org/10.2139/ssrn.2723620

William L. Megginson (Contact Author)

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

Antonio Meles

Second University of Naples (SUN) ( email )

Corso Gran Priorato di Malta, 2
Caserta, 8103
Italy

Gabriele Sampagnaro

University of Naples Parthenope ( email )

Via Ammiraglio Ferdinando Acton, 38
Via Generale Parisi, 13
Naples, 80133
Italy

Vincenzo Verdoliva

University of Naples Parthenope ( email )

Via Generale Parisi, 13, 80132, Napoli
80132
Italy

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