Venture Capital Conflicts of Interest: Evidence from Acquisitions of Venture Backed Firms

46 Pages Posted: 29 Mar 2007 Last revised: 15 Jan 2013

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Rajarishi Nahata

City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: July 6, 2009

Abstract

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

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

Ronald W. Masulis

University of New South Wales - Australian School of Business ( email )

Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Rajarishi Nahata (Contact Author)

City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

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