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IPO Underpricing, Wealth Losses and the Curious Role of Venture Capitalists in the Creation of Public Companies

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  • Alexander Ljungqvist

Abstract

Lower underpricing amongst venture-backed IPOs has been attributed to a certification role for venture capitalists. We argue that differences in underpricing per se are uninformative and possibly misleading when not controlling for differences in entrepreneurs` incentives to control underpricing. Using 1980s and 1990s data, we show that entrepreneurs’ wealth losses, a more suitable measure than underpricing, are unaffected by the presence of venture backers. Thus, we find no evidence of venture certification as far as IPO pricing is concerned. We also find possible evidence of a conflict of interest between venture backers and entrepreneurs which could explain why more prestigious underwriters in the 1990s are associated with higher underpricing.

Suggested Citation

  • Alexander Ljungqvist, 1999. "IPO Underpricing, Wealth Losses and the Curious Role of Venture Capitalists in the Creation of Public Companies," Economics Series Working Papers 1999-FE-04, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:1999-fe-04
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    Cited by:

    1. Franzke, Stefanie A. & Schlag, Christian, 2003. "Over-allotment options in IPOs on Germany's Neuer Markt: An empirical investigation," CFS Working Paper Series 2002/16, Center for Financial Studies (CFS).
    2. Achleitner, Ann-Kristin & Fingerle, Christian H., 2004. "What you get is what you need? The role of venture capitalists in managing growth of new ventures," CEFS Working Paper Series 2004-05, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    3. Dimitris Kenourgios & Spyros Papathanasiou & Emmanouil Rafail Melas, 2005. "Initial Performance of Greek IPOs, Underwriter’s Reputation and Oversubscription," Finance 0512023, University Library of Munich, Germany.
    4. 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.
    5. Jerry Coakley & Leon Hadass & Andrew Wood, 2009. "UK IPO underpricing and venture capitalists," The European Journal of Finance, Taylor & Francis Journals, vol. 15(4), pages 421-435.
    6. Cumming, Douglas J. & MacIntosh, Jeffrey G., 2003. "A cross-country comparison of full and partial venture capital exits," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 511-548, March.
    7. Roberto Pinheiro, 2018. "Venture capital and underpricing: capacity constraints and early sales," Annals of Finance, Springer, vol. 14(1), pages 1-47, February.
    8. Sun, Yue & Uchida, Konari & Matsumoto, Mamoru, 2013. "The dark side of independent venture capitalists: Evidence from Japan," Pacific-Basin Finance Journal, Elsevier, vol. 24(C), pages 279-300.
    9. Tiziana La Rocca, 2021. "Do prestigious underwriters shape IPO pricing? A meta-analytic review," Review of Managerial Science, Springer, vol. 15(3), pages 573-609, April.
    10. 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.
    11. 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.
    12. Maher Kooli & Jean-Marc Suret, 2001. "The Underpricing of Initial Public Offerings: Further Canadian Evidence," CIRANO Working Papers 2001s-50, CIRANO.
    13. Ali-Yrkkö, Jyrki & Hyytinen, Ari & Liukkonen, Johanna, 2001. "Exiting Venture Capital Investments: Lessons from Finland," Discussion Papers 781, The Research Institute of the Finnish Economy.
    14. Tykvova, Tereza & Walz, Uwe, 2007. "How important is participation of different venture capitalists in German IPOs?," Global Finance Journal, Elsevier, vol. 17(3), pages 350-378, March.
    15. 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, April.

    More about this item

    Keywords

    initial public offerings; underpricing; intermediation; certification; venture capital;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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