Do Underwriters Collaborate with Venture Capitalists in Ipos? Implications and Evidence
52 Pages Posted: 24 Mar 2005 Last revised: 7 Apr 2009
Date Written: April 6, 2009
We test for potential collaboration between underwriters, venture capitalists, and other major owner managers in initial public offerings (IPOs). We find that VCs who are more loyal and tolerate higher underpricing receive long-term marketing support and favorable analyst revisions, allowing them to exit at high prices. Cooperating underwriters receive repeat business and more profits from allocating underpriced shares. The end of this extended support coincides with heavy insider selling and significantly negative abnormal returns. VCs enforce cooperation by switching lead underwriters when favors are not returned. Our collaboration hypothesis resolves some previously surprising findings regarding underpricing, long-term underperformance, insider trading patterns, and analyst research.
Keywords: IPOs, initial public offerings, intial returns, collaboration, venture capital, underwriter, strategic alliances, quid pro quos
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