Grandstanding, Certification and the Underpricing of Venture Backed Ipos

36 Pages Posted: 24 Jul 2002

See all articles by Peggy M. Lee

Peggy M. Lee

Arizona State University (ASU) - Management Department

Sunil Wahal

Arizona State University (ASU) - Finance Department

Date Written: July 2002

Abstract

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

Lee, Peggy M. and Wahal, Sunil, Grandstanding, Certification and the Underpricing of Venture Backed Ipos (July 2002). Available at SSRN: https://ssrn.com/abstract=318360 or http://dx.doi.org/10.2139/ssrn.318360

Peggy M. Lee

Arizona State University (ASU) - Management Department ( email )

Tempe, AZ 85287-4006
United States

Sunil Wahal (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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