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Venture-backed IPOs - grandstanding and clusterings

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Abstract

The previous theoretical literature on IPOs has been carried out under the assumption of a free supply of new issues, emphasizing how the valuation and magnitude of new issues can be explained by mechanisms on the demand side. This model explains grandstanding and IPO clusterings based on supply side dynamics and adverse selection between venture capitalists and their investors. We derive the optimal divestment pattern of venture capitalists in the process of gaining reputation. From this we show how grandstanding and IPO clusterings are linked to financial constraints, and how competition for funding strengthens this result. Finally, we argue that the social loss in this context has three major components. Besides under- and overinvestment in new funds, some companies are divested too soon, in order for venture capitalists to signal good ability of project selection.

Suggested Citation

  • Grell, Kevin Berg, 2010. "Venture-backed IPOs - grandstanding and clusterings," Discussion Papers on Economics 4/2010, University of Southern Denmark, Department of Economics.
    • Handle: RePEc:hhs:sdueko:2010_004
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    More about this item

    Keywords

    Venture capital; VC-backed IPOs; grandstanding;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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