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Reducing Asymmetric Information in Venture Capital Backed IPOs

Listed author(s):
  • Escobari, Diego
  • Serrano, Alejandro

Purpose – The purpose of this paper is to model asymmetric information and study the profitability of venture capital (VC) backed initial public offerings (IPOs). Our mixtures approach endogenously separates IPOs into differentiated groups based on their returns’ determinants. We also analyze the factors that affect the probability that IPOs belong to a specific group. Design/methodology/approach – We propose a new method to model asymmetric information between investors and firms in VC backed IPOs. Our approach allows us to identify differentiated companies under incomplete information. We use a sample of 2,404 U.S. firms from 1980 through 2012 to estimate our mixture model via maximum likelihood. Findings – We find strong evidence that companies can be separated into two groups based on how IPO returns are determined. For companies in the first group the results are similar to previous studies. For companies in the second group we find that profitability is mainly affected by the reputation of the seed VC and capital expenditures. Tangible assets and age help explain group affiliation. We also motivate our findings for a continuum of heterogeneous IPO groups. Practical implications – The proposed mixture approach helps decrease asymmetric information for investors, regulators, and companies. Originality/value – Our mixture methods help decrease asymmetric information between investors and firms improving the probability of making profitable investments. Separating between groups of IPOs is crucial because different determinants of an IPO operating performance can potentially have opposite effects for different groups.

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File URL: https://mpra.ub.uni-muenchen.de/68140/1/MPRA_paper_68140.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 68140.

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Date of creation: 20 Nov 2015
Handle: RePEc:pra:mprapa:68140
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  1. Travis L. Jones, 2010. "Endogenous examination of underwriter reputation and IPO returns," Managerial Finance, Emerald Group Publishing, vol. 36(4), pages 284-293, March.
  2. Yewmun Yip, 2009. "Effects of underwriters, venture capital and industry on long-term initial public offering performance," Managerial Finance, Emerald Group Publishing, vol. 35(8), pages 700-715, July.
  3. Steven N. Kaplan & Per Strömberg, 2004. "Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses," Journal of Finance, American Finance Association, vol. 59(5), pages 2177-2210, October.
  4. Jain, Bharat A & Kini, Omesh, 1994. " The Post-Issue Operating Performance of IPO Firms," Journal of Finance, American Finance Association, vol. 49(5), pages 1699-1726, December.
  5. Li Gan & Roberto Mosquera, 2008. "An Empirical Study of the Credit Market with Unobserved Consumer Typers," NBER Working Papers 13873, National Bureau of Economic Research, Inc.
  6. Tian, Xuan, 2011. "The causes and consequences of venture capital stage financing," Journal of Financial Economics, Elsevier, vol. 101(1), pages 132-159, July.
  7. Li Gan & Manuel A. Hernandez, 2013. "Making Friends with Your Neighbors? Agglomeration and Tacit Collusion in The Lodging Industry," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 1002-1017, July.
  8. Ibbotson, Roger G., 1975. "Price performance of common stock new issues," Journal of Financial Economics, Elsevier, vol. 2(3), pages 235-272, September.
  9. Escobari, Diego, 2014. "Estimating Dynamic Demand for Airlines," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 26-29.
  10. Li Gan & Feng Huang & Adalbert Mayer, 2011. "A Simple Test of Private Information in the Insurance Markets with Heterogeneous Insurance Demand," NBER Working Papers 16738, National Bureau of Economic Research, Inc.
  11. Xuan Tian, 2011. "The Role of Venture Capital Syndication in Value Creation for Entrepreneurial Firms," Review of Finance, European Finance Association, vol. 16(1), pages 245-283.
  12. Tim Loughran & Jay Ritter, 2004. "Why Has IPO Underpricing Changed Over Time?," Financial Management, Financial Management Association, vol. 33(3), Fall.
  13. Krishnan, C. N. V. & Ivanov, Vladimir I. & Masulis, Ronald W. & Singh, Ajai K., 2011. "Venture Capital Reputation, Post-IPO Performance, and Corporate Governance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(05), pages 1295-1333, November.
  14. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
  15. Nahata, Rajarishi, 2008. "Venture capital reputation and investment performance," Journal of Financial Economics, Elsevier, vol. 90(2), pages 127-151, November.
  16. Gompers, Paul A, 1995. " Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-1489, December.
  17. Ritter, Jay R., 1987. "The costs of going public," Journal of Financial Economics, Elsevier, vol. 19(2), pages 269-281, December.
  18. Lee, Lung-Fei & Porter, Robert H, 1984. "Switching Regression Models with Imperfect Sample Separation Information-With an Application on Cartel Stability," Econometrica, Econometric Society, vol. 52(2), pages 391-418, March.
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