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Reducing asymmetric information in venture capital backed IPOs


  • Diego Escobari
  • Alejandro Serrano


Purpose - – The purpose of this paper is to model asymmetric information and study the profitability of venture capital (VC) backed initial public offerings (IPOs). The mixtures approach endogenously separates IPOs into differentiated groups based on their returns’ determinants. The authors also analyze the factors that affect the probability that IPOs belong to a specific group. Design/methodology/approach - – The authors propose a new method to model asymmetric information between investors and firms in VC backed IPOs. The approach allows the authors to identify differentiated companies under incomplete information. The authors use a sample of 2,404 US firms from 1980 through 2012 to estimate the mixture model via maximum likelihood. Findings - – The authors find strong evidence that companies can be separated into two groups based on how IPO returns are determined. For companies in the first group the results are similar to previous studies. For companies in the second group the authors find that profitability is mainly affected by the reputation of the seed VC and capital expenditures. Tangible assets and age help explain group affiliation. The authors also motivate the findings for a continuum of heterogeneous IPO groups. Practical implications - – The proposed mixture approach helps decrease asymmetric information for investors, regulators, and companies. Originality/value - – The mixture methods help decrease asymmetric information between investors and firms improving the probability of making profitable investments. Separating between groups of IPOs is crucial because different determinants of an IPO operating performance can potentially have opposite effects for different groups.

Suggested Citation

  • Diego Escobari & Alejandro Serrano, 2016. "Reducing asymmetric information in venture capital backed IPOs," Managerial Finance, Emerald Group Publishing, vol. 42(6), pages 553-568, June.
  • Handle: RePEc:eme:mfipps:v:42:y:2016:i:6:p:553-568

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    References listed on IDEAS

    1. Travis L. Jones & Mushfiq us Swaleheen, 2010. "Endogenous examination of underwriter reputation and IPO returns," Managerial Finance, Emerald Group Publishing, vol. 36(4), pages 284-293, March.
    2. Yewmun Yip & Yuli Su & Jiun Boon Ang, 2009. "Effects of underwriters, venture capital and industry on long-term initial public offering performance," Managerial Finance, Emerald Group Publishing, vol. 35(8), pages 700-715, July.
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    More about this item


    Venture capital; Initial public offerings; Mixture model;

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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


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