Grandstanding, Certification and the Underpricing of Venture Backed Ipos
36 Pages Posted: 24 Jul 2002
Date Written: July 2002
We examine the role of venture capital backing in the underpricing of IPOs. Controlling for endogeneity in the receipt of venture funding, we find that venture capital backed IPOs experience larger first-day returns than comparable non-venture backed IPOs. Between 1980 and 2000, the average return difference ranges from 6.20 to 9.51 percent. This return difference is particularly pronounced in the "bubble" period of 1999-2000. As a potential explanation for these results, we explore a variant of the grandstanding hypothesis, in which the publicity associated with high first-day returns brings future commitments of capital to venture capitalists. Capital flow regressions show that commitments of capital are positively related to first-day returns.
Suggested Citation: Suggested Citation