Public Market Players in the Private World: Implications for the Going-Public Process

We investigate the effect of pre-IPO investments by public market institutional investors (institutions) on the exit of venture capitalists (VCs). Results indicate that institutions' pre-IPO investments reduce IPO underpricing by mitigating VCs' reliance on all-star analysts to boost market liquidity. We conclude that institutions facilitate VC exits in the secondary market. Supporting this view, our analysis reveals that the presence of institutions allows VCs to exit with a reduced price impact in the secondary market. Consistent with the ease of exit, VCs offer fewer shares at the IPO and are more likely to invest in institutionally backed startups.

Keywords: Public Market Institutional Investors, Venture Capitalists, IPO Under-pricing, VC Exits

JEL Classification: G23, G24, L13

Suggested Citation: Suggested Citation

Huang, Shiyang and Mao, Yifei and Wang, Cong (Roman) and Zhou, Dexin, Public Market Players in the Private World: Implications for the Going-Public Process (April 3, 2020). Review of Financial Studies (RFS), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2898548 or http://dx.doi.org/10.2139/ssrn.2898548