Public Market Players in the Private World: Implications for the Going-Public Process
72 Pages Posted: 24 Jan 2017 Last revised: 29 Feb 2020
Date Written: December 30, 2019
We investigate the effect of public market institutional investor (institution) ownership in startups 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 institutions facilitate secondary market exit of VCs. Supporting this view, an insider trading analysis reveals that the presence of institutions allows VCs to liquidate in the secondary market with reduced price impact. Consistent with the ease of exit, VCs offer fewer shares at the IPO stage and are more involved in the boards of the institution-backed startups.
Keywords: IPO Underpricing, Venture Capital, Institutions
JEL Classification: G23, G24, L13
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