46 Pages Posted: 29 Mar 2007 Last revised: 15 Jan 2013
Date Written: July 6, 2009
We analyze the effects of venture capital (VC) backing on profitability of private firm acquisitions. We find VC backing leads to significantly higher acquirer announcement returns, averaging 3 percent, even after controlling for deal characteristics and endogeneity in venture funding. This leads us to investigate whether some VCs have interests which conflict with other investors. We show that such conflicts arise from VCs having financial relationships with both acquirers and targets, corporate VCs having a dominant strategic focus, and VC funds nearing maturity experiencing pressure to liquidate. Our conclusions follow from examinations of target takeover premia and acquirer announcement returns.
Keywords: Acquisitions, M&A, Venture Capital, Conflicts of Interest, Moral Hazard
JEL Classification: G34, G24
Suggested Citation: Suggested Citation
Masulis, Ronald W. and Nahata, Rajarishi, Venture Capital Conflicts of Interest: Evidence from Acquisitions of Venture Backed Firms (July 6, 2009). Journal of Financial and Quantitative Analysis (JFQA), 2011 (46), 395-430. Available at SSRN: https://ssrn.com/abstract=891571
By Alex Edmans