Public Market Players in the Private World: Implications for the Going-Public Process
83 Pages Posted: 24 Jan 2017 Last revised: 22 Jul 2020
Date Written: April 3, 2020
We investigate the eﬀect of the pre-IPO investments by public market institu-tional investors (institutions) on the exit of venture capitalists (VCs). We show that institutions’ pre-IPO investments reduce IPO underpricing by mitigating VCs’ reliance on all-star analysts in boosting market liquidity. We conclude that institu-tions facilitate VC exits in the secondary market. Supporting this view, our analysis of insider trading reveals that the presence of institutions allows VCs to exit with 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 institution-backed startups.
Keywords: Public Market Institutional Investors, Venture Capitalists, IPO Under-pricing, VC Exits
JEL Classification: G23, G24, L13
Suggested Citation: Suggested Citation