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Financial distress risk in initial public offerings: How much do venture capitalists matter?

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  • Megginson, William L.
  • Meles, Antonio
  • Sampagnaro, Gabriele
  • Verdoliva, Vincenzo

Abstract

Using a sample of 1593 US firms that go public between 1990 and 2007, we find that VC-backed IPOs experience less financial distress risk post-offering than do comparable non-VC-backed IPOs. After controlling for endogeneity, we find this is related to the screening done by VC-investors, who select firms with lower risk of financial distress and by VCs reducing risks when they finance portfolio firms. We find companies backed by more reputable VCs exhibit higher levels of financial distress risk even when they show superior operating performance, due to their highly levered capital structure and investment in relatively illiquid assets.

Suggested Citation

  • Megginson, William L. & Meles, Antonio & Sampagnaro, Gabriele & Verdoliva, Vincenzo, 2019. "Financial distress risk in initial public offerings: How much do venture capitalists matter?," Journal of Corporate Finance, Elsevier, vol. 59(C), pages 10-30.
    • Handle: RePEc:eee:corfin:v:59:y:2019:i:c:p:10-30
    DOI: 10.1016/j.jcorpfin.2016.09.007
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    Cited by:

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    2. Blomkvist, Magnus & Korkeamaki, Timo P. & Takalo, Tuomas, 2020. "Staged equity financing," Bank of Finland Research Discussion Papers 15/2020, Bank of Finland.
    3. repec:zbw:bofrdp:2020_015 is not listed on IDEAS
    4. Nguyen, Minh-Hoang & Huyen, Nguyen Thanh Thanh & Pham, Thanh-Hang & Yen, Nguyen Thi Quynh & Vuong, Quan-Hoang, 2020. "On the 50-year research landscape of entrepreneurial finance: A sign of Western ideological homogeneity?," OSF Preprints qf62s, Center for Open Science.
    5. Magnus, Blomkvist & Korkeamäki, Timo & Takalo, Tuomas, 2020. "Staged equity financing," Research Discussion Papers 15/2020, Bank of Finland.
    6. Blomkvist, Magnus & Korkeamäki, Timo & Takalo, Tuomas, 2022. "Learning and staged equity financing," Journal of Corporate Finance, Elsevier, vol. 74(C).
    7. Meles, Antonio & Salerno, Dario & Sampagnaro, Gabriele & Fu, Mengchuan, 2021. "The going-public decision and firm risk," Journal of Financial Stability, Elsevier, vol. 54(C).
    8. Nguyen, Giang & Vu, Le, 2021. "Does venture capital syndication affect mergers and acquisitions?," Journal of Corporate Finance, Elsevier, vol. 67(C).
    9. Fisch, Christian & Momtaz, Paul P., 2020. "Institutional investors and post-ICO performance: an empirical analysis of investor returns in initial coin offerings (ICOs)," Journal of Corporate Finance, Elsevier, vol. 64(C).
    10. Nawab Khan & Haitao Qu & Jing Qu & ChunMiao Wei & Shihao Wang, 2021. "Does Venture Capital Investment Spur Innovation? A Cross-Countries Analysis," SAGE Open, , vol. 11(1), pages 21582440211, March.
    11. Douglas Cumming & Satish Kumar & Weng Marc Lim & Nitesh Pandey, 2023. "Mapping the venture capital and private equity research: a bibliometric review and future research agenda," Small Business Economics, Springer, vol. 61(1), pages 173-221, June.
    12. Nguyen, Justin Hung & Phan, Hieu V., 2020. "Carbon risk and corporate capital structure," Journal of Corporate Finance, Elsevier, vol. 64(C).
    13. Liu, Bai & Ju, Tao & Bai, Min & Yu, Chia-Feng (Jeffrey), 2021. "Imitative innovation and financial distress risk: The moderating role of executive foreign experience," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 526-548.
    14. Salim Chahine & Gonul Colak & Iftekhar Hasan & Mohamad Mazboudi, 2020. "Investor relations and IPO performance," Review of Accounting Studies, Springer, vol. 25(2), pages 474-512, June.

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    More about this item

    Keywords

    Venture capital; Financial distress risk; Bankruptcy; IPOs; Reputation;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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