Do Venture Capital Investors Learn from Public Markets?

56 Pages Posted: 19 May 2016 Last revised: 12 Feb 2017

Bibo Liu

Tsinghua University - PBC School of Finance

Xuan Tian

Tsinghua University - PBC School of Finance

Date Written: February 12, 2017

Abstract

We examine whether venture capital (VC) investors learn information contained in public market stock prices when investing in their startup firms. We find that, when public market prices are more informative, VCs are less likely to stage finance startup firms and to syndicate with other VCs to save the costs associated with staging and syndication. This effect is more pronounced when VCs are lack of industry-specific expertise, VCs are physically distant from their ventures so that collecting soft information is costly, and startup firms are less risky. Using exogenous events that unexpectedly alter the informativeness of stock prices, we show that our results are unlikely driven by endogeneity. We also find that the sensitivity of VC investment in an industry to public market signals, proxied by industry Tobin’s Q, is higher when public market prices are more informative. Our paper sheds new light on the real effects of financial markets by showing that private equity investors actively learn information from public equity markets.

Keywords: Learning; Venture capital; Staging; Syndication; Price informativeness

JEL Classification: G24, G18, G14

Suggested Citation

Liu, Bibo and Tian, Xuan, Do Venture Capital Investors Learn from Public Markets? (February 12, 2017). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2780890 or http://dx.doi.org/10.2139/ssrn.2780890

Bibo Liu

Tsinghua University - PBC School of Finance ( email )

Beijing, Beijing 100084
China
86-10-62795701 (Phone)

Xuan Tian (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

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