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Venture-backed IPOs - grandstanding and clusterings

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    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.

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    Paper provided by Department of Business and Economics, University of Southern Denmark in its series Discussion Papers of Business and Economics with number 4/2010.

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    Length: 37 pages
    Date of creation: 24 Sep 2010
    Handle: RePEc:hhs:sdueko:2010_004
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    Department of Business and Economics, University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark

    Phone: 65 50 32 33
    Fax: 65 50 32 37
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