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The causal effect of venture capital backing on the underpricing of Italian initial public offerings

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  • Luca Pennacchio

Abstract

This paper investigates the role of venture capitalists in Italian Initial Public Offerings (IPOs). Between 1999 and 2012, venture capital (VC) backed IPOs are on average less underpriced than non-VC-backed IPOs. By using both matching methods and a regression-based approach to account for the non-random distribution of venture financing across firms, the analysis shows that underpricing difference is actually due to the causal effect of VC backing and that the raw comparison of the average underpricing between the two types of IPOs underestimates such effect. The result is consistent with the certification hypothesis, that is, having certified that the value of issuing firms would reflect all relevant inside information, VC backing will reduce the information asymmetry that arises in the IPO process and the cost of going public.

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  • Luca Pennacchio, 2014. "The causal effect of venture capital backing on the underpricing of Italian initial public offerings," Venture Capital, Taylor & Francis Journals, vol. 16(2), pages 131-155, April.
    • Handle: RePEc:taf:veecee:v:16:y:2014:i:2:p:131-155
    DOI: 10.1080/13691066.2014.899737
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    References listed on IDEAS

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    1. Antonio Acconcia & Alfredo Del Monte & Luca Pennacchio & Germana Scepi, 2011. "IPO Underpricing and the Location of Firms," CSEF Working Papers 295, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 04 Feb 2021.
    2. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 213-232.
    3. Henry Chen & Paul Gompers & Anna Kovner & Josh Lerner, 2009. "Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion," NBER Working Papers 15102, National Bureau of Economic Research, Inc.
    4. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
    5. Shahidur R. Khandker & Gayatri B. Koolwal & Hussain A. Samad, . "Handbook on Impact Evaluation : Quantitative Methods and Practices," World Bank Publications, The World Bank, number 2693, September.
    6. Jenkinson, Tim & Ljungqvist, Alexander, 2001. "Going Public: The Theory and Evidence on How Companies Raise Equity Finance," OUP Catalogue, Oxford University Press, edition 2, number 9780198295990, Decembrie.
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    1. Markus Fitza & Thomas J. Dean, 2016. "How much do VCS and underwriters matter? A comparative investigation of venture capitalist and underwriter effects on IPO underpricing," Venture Capital, Taylor & Francis Journals, vol. 18(2), pages 95-114, April.
    2. Andrea Bellucci & Luca Pennacchio & Alberto Zazzaro, 2019. "R&D Subsidies and Firms’ Debt Financing," CSEF Working Papers 527, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    3. Cirillo, Alessandro & Romano, Mauro & Pennacchio, Luca, 2015. "All the power in two hands: The role of CEOs in family IPOs," European Management Journal, Elsevier, vol. 33(5), pages 392-406.

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