How Do Venture Investments by Different Classes of Financial Institutions Affect the Equity Underwriting Process?

51 Pages Posted: 21 Mar 2008 Last revised: 18 Sep 2008

See all articles by Xi Li

Xi Li

University of Arkansas - Department of Finance

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)

Date Written: September 30, 2007

Abstract

Over the 1993-2000 period, a majority of U.S. venture-backed IPOs have venture backing by financial institutions. Each class of financial institutions has its own asset expertise, investment criteria and access to proprietary information on private firms, which we exploit evaluating whether venture investments by commercial banks, investment banks and insurance companies have independent effects on the equity underwriting process. We also examine whether these effects are a function of investment size and whether the effects differ for debt (loans) and equity investments. We find that each class of financial institutions making venture investments in a firm going public is associated with evidence of lower adverse selection risk; namely reduced underpricing and absolute offer price revisions and stronger long-term operating performance. The impacts of debt or equity investments by separate classes of financial institutions are largely additive. Moreover, the size of financial institution ownership in an issuer is more informative than the presence of financial institution investors. This body of evidence is consistent with equity holdings and loans by each class of financial institutions providing independent certification of issuer quality.

Keywords: IPO, Underpricing of Stock Offers, Venture Capital, Financial Institutions, Certification Hypothesis, Conflict of Interest, Underwriting

JEL Classification: G24, G21, G14, G2, D81, D82, K22, K23, M13, M21

Suggested Citation

Li, Xi and Masulis, Ronald W., How Do Venture Investments by Different Classes of Financial Institutions Affect the Equity Underwriting Process? (September 30, 2007). Available at SSRN: https://ssrn.com/abstract=891738 or http://dx.doi.org/10.2139/ssrn.891738

Xi Li

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

Ronald W. Masulis (Contact Author)

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

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