IDEAS home Printed from https://ideas.repec.org/a/eee/empfin/v19y2012i5p782-795.html
   My bibliography  Save this article

Nonlinearity and smoothing in venture capital performance data

Author

Listed:
  • McKenzie, Michael
  • Satchell, Stephen
  • Wongwachara, Warapong

Abstract

Performance indices for illiquid investments are known to suffer from returns smoothing, and the purpose of this paper is to investigate the presence and nature of such smoothing in the context of venture capital. We find that while the standard techniques may or may not indicate the presence of smoothing, significant evidence of smoothing exists when a nonlinear regime-dependent model is specified. Further, the model suggests the presence of regime-specific responsiveness of venture capital returns whereby different weights are placed on newly arrived information in different regimes.

Suggested Citation

  • McKenzie, Michael & Satchell, Stephen & Wongwachara, Warapong, 2012. "Nonlinearity and smoothing in venture capital performance data," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 782-795.
    • Handle: RePEc:eee:empfin:v:19:y:2012:i:5:p:782-795
    DOI: 10.1016/j.jempfin.2012.08.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927539812000618
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jempfin.2012.08.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Christof Beuselinck & Marc Deloof & Sophie Manigart, 2008. "Private Equity Investments and Disclosure Policy," European Accounting Review, Taylor & Francis Journals, vol. 17(4), pages 607-639.
    2. Tanaka, Katsuto & Satchell, S.E., 1989. "Asymptotic Properties of the Maximum-Likelihood and Nonlinear Least-Squares Estimators for Noninvertible Moving Average Models," Econometric Theory, Cambridge University Press, vol. 5(3), pages 333-353, December.
    3. Pesaran, M. Hashem & Timmermann, Allan, 2002. "Market timing and return prediction under model instability," Journal of Empirical Finance, Elsevier, vol. 9(5), pages 495-510, December.
    4. Cumming, Douglas J. & MacIntosh, Jeffrey G., 2003. "A cross-country comparison of full and partial venture capital exits," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 511-548, March.
    5. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
    6. David M. Geltner, 1993. "Estimating Market Values from Appraised Values without Assuming an Efficient Market," Journal of Real Estate Research, American Real Estate Society, vol. 8(3), pages 325-346.
    7. Cochrane, John H., 2005. "The risk and return of venture capital," Journal of Financial Economics, Elsevier, vol. 75(1), pages 3-52, January.
    8. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-430, March.
    9. Andrew C. Harvey, 1990. "The Econometric Analysis of Time Series, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026208189x, December.
    10. Knight John & Satchell Stephen, 2011. "Some New Results for Threshold AR(1) Models," Journal of Time Series Econometrics, De Gruyter, vol. 3(2), pages 1-42, April.
    11. Geltner, David Michael, 1991. "Smoothing in Appraisal-Based Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 4(3), pages 327-345, September.
    12. Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, vol. 7(2), pages 197-226, June.
    13. Douglas Cumming & Uwe Walz, 2010. "Private equity returns and disclosure around the world," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(4), pages 727-754, May.
    14. Cumming, Douglas & Dai, Na, 2010. "Local bias in venture capital investments," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 362-380, June.
    15. Getmansky, Mila & Lo, Andrew W. & Makarov, Igor, 2004. "An econometric model of serial correlation and illiquidity in hedge fund returns," Journal of Financial Economics, Elsevier, vol. 74(3), pages 529-609, December.
    16. Bollen, Nicolas P. B. & Pool, Veronika K., 2008. "Conditional Return Smoothing in the Hedge Fund Industry," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(2), pages 267-298, June.
    17. Susan E. Woodward & Robert E. Hall, 2004. "Benchmarking the Returns to Venture," NBER Working Papers 10202, National Bureau of Economic Research, Inc.
    18. Douglas Cumming, 2008. "Contracts and Exits in Venture Capital Finance," The Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 1947-1982, September.
    19. N/A, 1991. "Appraisal," National Institute Economic Review, National Institute of Economic and Social Research, vol. 138(1), pages 3-5, November.
    20. Douglas J. Cumming & Jeffrey G. MacIntosh, 2007. "Mutual funds that invest in private equity? An analysis of labour-sponsored investment funds," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 31(3), pages 445-487, May.
    21. Michael D. McKenzie & William H. Janeway, 2011. "Venture capital funds and the public equity market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(3), pages 764-786, September.
    22. Arthur Korteweg & Morten Sorensen, 2010. "Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies," The Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3738-3772, October.
    23. Fisher, Jeffrey D & Geltner, David M & Webb, R Brian, 1994. "Value Indices of Commercial Real Estate: A Comparison of Index Construction Methods," The Journal of Real Estate Finance and Economics, Springer, vol. 9(2), pages 137-164, September.
    24. Pham, Tuan D. & Tran, Lanh T., 1985. "Some mixing properties of time series models," Stochastic Processes and their Applications, Elsevier, vol. 19(2), pages 297-303, April.
    25. Hwang Min & Quigley John M. & Woodward Susan E., 2005. "An Index For Venture Capital, 1987-2003," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-45, November.
    26. Pesaran, M Hashem & Timmermann, Allan, 1995. "Predictability of Stock Returns: Robustness and Economic Significance," Journal of Finance, American Finance Association, vol. 50(4), pages 1201-1228, September.
    27. Nicolas P.B. Bollen & Robert E. Whaley, 2009. "Hedge Fund Risk Dynamics: Implications for Performance Appraisal," Journal of Finance, American Finance Association, vol. 64(2), pages 985-1035, April.
    28. Hansen Bruce E., 1997. "Inference in TAR Models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 2(1), pages 1-16, April.
    29. Cumming, Douglas & Dai, Na, 2011. "Fund size, limited attention and valuation of venture capital backed firms," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 2-15, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. McKenzie, Michael & Satchell, Stephen & Wongwachara, Warapong, 2014. "Converting true returns into reported returns: A general theory of linear smoothing and anti-smoothing," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 215-229.
    2. Loic Mar'echal & Alain Mermoud & Dimitri Percia David & Mathias Humbert, 2024. "Measuring the performance of investments in information security startups: An empirical analysis by cybersecurity sectors using Crunchbase data," Papers 2402.04765, arXiv.org, revised Feb 2024.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. McKenzie, Michael & Satchell, Stephen & Wongwachara, Warapong, 2014. "Converting true returns into reported returns: A general theory of linear smoothing and anti-smoothing," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 215-229.
    2. Wang, Lanfang & Wang, Susheng, 2012. "Economic freedom and cross-border venture capital performance," Journal of Empirical Finance, Elsevier, vol. 19(1), pages 26-50.
    3. Chortareas, Georgios E. & Girardone, Claudia & Ventouri, Alexia, 2013. "Financial freedom and bank efficiency: Evidence from the European Union," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1223-1231.
    4. Newton, David & Platanakis, Emmanouil & Stafylas, Dimitrios & Sutcliffe, Charles & Ye, Xiaoxia, 2021. "Hedge fund strategies, performance &diversification: A portfolio theory & stochastic discount factor approach," The British Accounting Review, Elsevier, vol. 53(5).
    5. Cumming, Douglas & Helge Haß, Lars & Schweizer, Denis, 2013. "Private equity benchmarks and portfolio optimization," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3515-3528.
    6. Achleitner, Ann-Kristin & Engel, Nico & Reiner, Uwe, 2013. "The performance of venture capital investments: Do investors overreact?," Review of Financial Economics, Elsevier, vol. 22(1), pages 20-35.
    7. Jean‐Christophe Delfim & Martin Hoesli, 2021. "Robust desmoothed real estate returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(1), pages 75-105, March.
    8. Humphery-Jenner, Mark & Suchard, Jo-Ann, 2013. "Foreign VCs and venture success: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 16-35.
    9. Ann‐Kristin Achleitner & Nico Engel & Uwe Reiner, 2013. "The performance of venture capital investments: Do investors overreact?," Review of Financial Economics, John Wiley & Sons, vol. 22(1), pages 20-35, January.
    10. Benoît Dewaele, 2013. "Leverage and Alpha: The Case of Funds of Hedge Funds," Working Papers CEB 13-033, ULB -- Universite Libre de Bruxelles.
    11. Cumming, Douglas & Zhang, Yelin, 2016. "Alternative investments in emerging markets: A review and new trends," Emerging Markets Review, Elsevier, vol. 29(C), pages 1-23.
    12. M. Glawischnig & I. Seidl, 2013. "Portfolio optimization with serially correlated, skewed and fat tailed index returns," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 21(1), pages 153-176, January.
    13. Armonat, Stefan & Pfnür, Andreas, 2003. "Asset allocation versus entrepreneurial decisions in real estate investment," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 35582, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    14. Pengda Fan & Kazuo Yamada, 2020. "Same bed different dream composition of IPO shares and withdrawal decisions in weak market conditions," Small Business Economics, Springer, vol. 55(4), pages 955-974, December.
    15. Buchner, Axel & Mohamed, Abdulkadir & Schwienbacher, Armin, 2017. "Diversification, risk, and returns in venture capital," Journal of Business Venturing, Elsevier, vol. 32(5), pages 519-535.
    16. Wang, Lanfang & Wang, Susheng, 2017. "Buybacks as an efficient strategy for venture capital in emerging markets," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 107-123.
    17. Dimson, Elroy & Spaenjers, Christophe, 2011. "Ex post: The investment performance of collectible stamps," Journal of Financial Economics, Elsevier, vol. 100(2), pages 443-458, May.
    18. Arthur Korteweg & Roman Kräussl & Patrick Verwijmeren, 2016. "Does it Pay to Invest in Art? A Selection-Corrected Returns Perspective," The Review of Financial Studies, Society for Financial Studies, vol. 29(4), pages 1007-1038.
    19. Ann-Kristin Achleitner & Reiner Braun & Eva Lutz & Uwe Reiner, 2014. "Industry relatedness in trade sales and venture capital investment returns," Small Business Economics, Springer, vol. 43(3), pages 621-637, October.
    20. Farrelly, Kieran & Stevenson, Simon, 2019. "The risk and return of private equity real estate funds," Global Finance Journal, Elsevier, vol. 42(C).

    More about this item

    Keywords

    Regime switching; Threshold autoregressive model; Venture capital returns;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:empfin:v:19:y:2012:i:5:p:782-795. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jempfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.