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Informational externalities of initial public offerings: Does venture capital backing matter?

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  • Carmen Cotei
  • Joseph Farhat

Abstract

We examine the role of venture capital backing on informational externalities generated by IPO firms. Theoretical models predict that going public firms generate positive externalities creating a spillover effect for other firms to go public. In this paper, we posit that venture backed IPOs convey positive information about industry and this information is transferred to rival firms. We also hypothesize that intra-industry information transfer varies with rivals’ characteristics and IPO price revisions generate additional information that affects rivals’ valuation. The results show that rivals have positive valuation effects in response to venture backed IPOs and no significant reaction in response to non-venture backed IPOs. We find evidence that the effect on rival firms is stronger if they operate in less concentrated industries and have high growth opportunities. The larger the IPO proceeds, the higher the magnitude of rivals ‘valuation effects. Positive (negative) information revealed in the form of upward (downward) price revisions significantly impacts rivals’ reaction in response to venture backed IPOs. Copyright Springer Science+Business Media, LLC 2013

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  • Carmen Cotei & Joseph Farhat, 2013. "Informational externalities of initial public offerings: Does venture capital backing matter?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(1), pages 80-99, January.
    • Handle: RePEc:spr:jecfin:v:37:y:2013:i:1:p:80-99
    DOI: 10.1007/s12197-010-9167-2
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    1. Boucher, Carène & Kooli, Maher, 2021. "SEOs: Friendly or threatening game for rivals?," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 130-144.

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    More about this item

    Keywords

    Intra-industry Information Transfer; Initial Public Offerings; Venture Capital Backing; Price Revisions; G24;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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