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Conflicts of interest and the performance of venture-capital-backed IPOs: A preliminary look at the UK

Author

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  • Susanne Espenlaub
  • Ian Garrett
  • Wei Peng Mun

Abstract

We document the incidence of initial public offerings (IPOs) issued by UK companies with existing venture capital investors and sponsored (and underwritten) by issuing houses that are parents or affiliates of the venture capital backers. The effects on the performance of the stock offering of the resulting conflicts of interest between the venture capitalist-affiliated sponsors and the investors taking up the stock is examined. Contrary to the conflicts-of interest hypothesis, IPOs underwritten by VC affiliates perform better in the long-term than other IPOs. We also examine the role of the reputation of the financial firms involved in the IPO. The long-term performance of UK IPOs is found to be positively related to the reputation of the venture capital backers. In the short-term, IPO returns appear to be related to the prestige of the sponsor rather than the venture capitalist in that top fifteen underwriters are associated with lower short-returns. Although there is evidence of higher initial returns in IPOs where the sponsor and venture capitalist are affiliated, this is offset by an approximately equal reduction in initial returns if the venture capitalist is associated with an issuing house which may or may not act as the actual IPO sponsor. Thus, the net effect is that backing by venture capitalists with links to issuing houses reduces initial returns but only if those affiliates are in fact not employed as the actual sponsors to the offerings.

Suggested Citation

  • Susanne Espenlaub & Ian Garrett & Wei Peng Mun, 1999. "Conflicts of interest and the performance of venture-capital-backed IPOs: A preliminary look at the UK," Venture Capital, Taylor & Francis Journals, vol. 1(4), pages 325-349, October.
  • Handle: RePEc:taf:veecee:v:1:y:1999:i:4:p:325-349
    DOI: 10.1080/136910699295848
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    Citations

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    Cited by:

    1. Alan Hughes & Jaeho Lee, 2006. "What's in a name and when does it matter? The hot and cold market impacts on underpricing of certification, reputation and conflicts of interest in venture capital backed Korean IPOs," Working Papers wp336, Centre for Business Research, University of Cambridge.
    2. Rosenbusch, Nina & Brinckmann, Jan & Müller, Verena, 2013. "Does acquiring venture capital pay off for the funded firms? A meta-analysis on the relationship between venture capital investment and funded firm financial performance," Journal of Business Venturing, Elsevier, vol. 28(3), pages 335-353.
    3. Groh, Alexander P., 2004. "Risikoadjustierte Performance von Private Equity-Investitionen," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 21382, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    4. Yochanan Shachmurove, 2001. "Annualized Returns of Venture-Backed Public Companies Categorized by Stage of Financing: An Empirical Investigation of IPOS in the Last Three Decades," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 6(1), pages 44-58, Spring.
    5. Chahine, Salim & Filatotchev, Igor, 2008. "The effects of venture capitalist affiliation to underwriters on short- and long-term performance in French IPOs," Global Finance Journal, Elsevier, vol. 18(3), pages 351-372.
    6. Riccardo Ferretti & Antonio Meles, 2010. "Underpricing, wealth loss for pre-existing shareholders and the cost of going public: the role of private equity backing in Italian IPOs," Venture Capital, Taylor & Francis Journals, vol. 13(1), pages 23-47, September.
    7. Yochanan Shachmurove, "undated". "An Empirical Investigation of IPO's Annualized Returns in the Last Three Decades," Penn CARESS Working Papers 823ad5f6b6eb3583cc703364e, Penn Economics Department.
    8. Ranko Jelic & Brahim Saadouni & Mike Wright, 2005. "Performance of Private to Public MBOs: The Role of Venture Capital," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(3-4), pages 643-682.

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