Publicly listing venture capital backed companies at the expense of greater underpricing

Abstract

In this paper, I examine the effect of venture capital ownership on IPO underpricing in the U.S. between 2000 and 2019. First introduced by Weiss & Megginson (1991), the venture capitalist certification hypothesis argues that the certification provided by venture capital investors leads to lower degrees of underpricing. Lee & Wahal (2004), however, find the opposite, arguing that venture capital firms need to push portfolio companies to IPOs in order to grow their reputation, even at the expense of greater underpricing. I aim to contribute to the discussion by looking at the phenomenon in the 21st century. I cross-sectionally regress underpricing with venture capital ownership while controlling for offering size, underwriter reputation, underwriter syndicate size, company age as well as fixed effects of year, industry and state. Consistent with the grandstanding hypothesis, my results suggest with significance that venture capital ownership leads to higher underpricing.