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Grandstanding in the Venture Capital Industry

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Abstract

I develop and test the hypothesis that young venture capital firms take companies pubic earlier than older venture capital firms in order to establish a reputation and successfully raise capital for new funds. Evidence from a sample of 433 IPOs suggests that companies backed by young venture capital firms are younger and more underpriced at their IPO than those of established venture capital firms. Moreover, young venture capital firms have been on the board of directors a shorter period of time at the IPO, hold smaller equity stakes, and time the IPO to precede or coincide with raising money for follow-on funds.

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... Another hypothesis to explain the influence of VC on the underpricing of an IPO is the so-called grandstanding hypothesis first mentioned by Gompers (1996) in the paper "Grandstanding in the Venture Capital Industry." This hypothesis states that a VC firm aims to take its company public as quickly as possible to improve the company's reputation. ...
... This hypothesis states that a VC firm aims to take its company public as quickly as possible to improve the company's reputation. A VC firm hopes to quickly collect the capital of the resulting funds due to the company's improved reputation (Gompers 1996). Intending to bring the company as quickly Content courtesy of Springer Nature, terms of use apply. ...
... As the companies are usually younger and not yet very established, the information asymmetry on the part of the investors regarding the true potential of the company is amplified by an increase in underpricing. The grandstanding hypothesis thus explains an increased underpricing of VC-backed IPOs compared to non-sponsored IPOs (Gompers 1996). This hypothesis is reinforced in the paper "Grandstanding, Certification and the Underpricing of Venture Capital-Backed IPOs" by Lee and Wahal (2004). ...
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Building on a resource-based view, this study argues that independent venture capital (IVC) firms and corporate venture capital (CVC) firms have different impacts on the underpricing of their backed initial public offerings (IPOs). This is due to their different resources, motivations, and interests. Using a sample of 612 VC-backed IPOs from 2000 to 2020, we find a significant difference in underpricing among CVC- and IVC-backed IPOs. The matching method used by Megginson and Weiss (1991) and propensity score matching both show significant differences in underpricing between CVC-backed and IVC-backed IPOs. This paper shows that the difference in the influence of CVC and IVC backing on underpricing in IPOs has changed over time. While there was a significant difference from 2000–2009 in our models, this difference was no longer present in the more recent period of 2010–2020.
... However, research on VC reputation impact on the pre-IPO performance of their portfolio firms is minimal. There should be a connection between them because the vast majority of venture capitalists push their portfolios' firms to go public prematurely to establish their reputations for the next round of fund-raising (Gompers, 1996). Meanwhile, as an IPO is the most profitable exit strategy relative to other exit options (Black & Gilson, 1998), VCs intend to establish their reputation through more successful IPOs. ...
... Meanwhile, Sorensen (2007) demonstrates that reputable VCs have the experience to select firms with superior pre-IPO performance and add incremental value to their portfolios. Thus, to preserve and enhance their reputation, reputable VCs, to a certain extent, prefer to invest in companies with outstanding pre-IPO performance for future IPOs, because taking portfolio firms public is critical for VCs' next round of fund-raising and their reputation promotion (Gompers, 1996). Therefore, a hypothesis is proposed below: ...
... IPO probabilities are significantly associated with the determinants of pre-IPO performance because pre-IPO financial factors influence IPO success (Long, 2014). More portfolio firms go public; more reputation is promoted for VCs (Gompers, 1996) while establishing the reputation is critical for the next round of fundraising. Therefore, the pre-IPO performance of portfolio firms directly connects to their IPO success, consequently effects VC reputation. ...
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This study investigates venture capital (VC) reputation impact on the pre-IPO performance of the entrepreneurial firms backed by three kinds of VCs. This study employs backward stepwise regression models following prior theoretical frameworks to examine the research question. Based on a database of the top 50 VC firms ranked during 2016 to 2020 and their portfolio firms. This study shows some contingent contribution to pre-IPO firm performance. Firstly, the reputation of the Chinese government-owned VCs is negatively associated with their portfolio firm performance. Still, there is a positive relationship between foreign and local private VCs. Secondly, entrepreneurial firm performance is significantly associated with industry policy and entrepreneur’s performance than VC reputation. This study has practical implications for entrepreneurs and limited partners regarding their corporation relationships with the Chinese VCs.
... However, European and American scholars have found that some young VCs are eager to establish an industry reputation and will quickly push immature startups to the market using financial whitewashing and false disclosure to help startups cover up their inferior performance until they exit after listing. This radical and short-sighted (grandstanding) behavior affects the stable operation of the capital market [9][10][11][12][13]. However, on the contrary, Zhang and Liao [14], Wang et al. [15], and Song et al. [16] found that the IPO underpricing rate of enterprises held by VCs is lower. ...
... This paper compares the differences, advantages, and disadvantages of different IPO issuance systems in the particular period of China's gradual market-oriented reform, the coexistence of a registration system and an approval system, which enriches the diversity of IPO-related research. Secondly, the existing European and American literature shows that under the registration system, some younger VCs may push immature startups into the market to build their reputation, and there are "grandstanding" behaviors [9,11,12]. On the contrary, as per the existing literature in China, a VC can significantly reduce the first-day underpricing rate of startups under the approval system of substantive audit, and there is no grandstanding behavior. However, because of the differences in the market environment and institutional culture in different economies, the research conclusions at home and abroad do not support each other. ...
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The government’s intervention under the approval system seriously affects the healthy and sustainable development of the financial market. An IPO is an important way for a venture capitalist (VC) to gain income, which impacts the efficiency of resource allocation in the capital market. From the perspective of resource allocation efficiency, this paper compares the influence of venture capital on the IPO process of startup enterprises under registration and approval systems. The findings are as follows: (1) after the trial registration system, the speed of passing and listing of VC-owned startup enterprises can be significantly accelerated. (2) Venture capitalists can accelerate the startup enterprises’ speed of passing by sending directors to startup enterprises and improving the level of risk disclosure, which is only significant under the registration and issuance system. (3) Further research shows that VC-supported startups perform better after listing. (4) VCs can help startup enterprises to choose hot season listing, which has a good timing effect. The conclusion of this text study is still robust after using propensity score matching (PSM) and Heckman to eliminate endogeneity. The conclusion of this study provides a theoretical basis and empirical support for emerging market countries to promote market-oriented reform.
... (1994b), Gompers (1995Gompers ( , 1996, Murray (1995), Lerner (1998, 1999), and Brav and Gompers (1997), has examined the economics of the venture capital cycle (including venture capital fundraising, investing, and exiting) in the U.S. and Western Europe. The existence of higher agency cost associated with information asymmetry between venture capitalists and entrepreneurs (in contrast with lower agency costs between shareholders and managers in a publicly-traded company) is a distinct feature of venture capital finance. ...
... Exit or divestment can be accomplished by a number of means such as an initial public offering or acquisition by another company. Studies of the U.S. market [Barry et al (1990), Lerner (1994b), Gompers (1996), Brav et al. (1997)] suggest that the most profitable venture capital exit has, on average, been disproportionately by way of an IPO. In 1999, 270 US venture-backed companies exited though IPOs with an all time high offering size of $20.9billion. ...
... For instance, releasing more products than competitors or securing more patents can be helpful for start-ups in obtaining higher-status investors or higher valuations (Hallen, 2008;Hsu & Ziedonis, 2013). In the VC context, having investments result in an IPO may be an especially strong signal, both reflecting the strong performance that a VC firm achieved in its current deal and also that a VC is likely to attract increasingly higher-quality start-ups in the near future (Gompers, 1996;Pollock et al., 2015). ...
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Research Summary: This paper investigates how reputation affects firm responses to resource mobilization opportunities. We theorize that lower-reputation firms are likely to be particularly responsive to resource mobilization opportunities because they are otherwise constrained. By contrast, higher-reputation firms have access to greater resource supply and may self-restrain demand. We test these arguments in the context of venture capital (VC) firms raising investment funds. We indeed find that lower-reputation VCs are more responsive to opportunities presented by recent successes. Unexpectedly, we find that high-reputation VCs are more responsive to market-wide heat. Through multi-method follow-on analyses, we propose that while recent successes constitute "windows of opportunity" upon which firms act with individual discretion, hot market conditions serve as "waves of opportunity," exerting a push on the resource mobilization of all firms and influencing their propensity toward scaling up.
... As a result, LP influence over the fund through voting or exit is limited and fundamentally different from other settings. Notably, the PE fund setting provides an avenue to explore other governance mechanisms, including reputation (e.g., Gompers 1996). Further, although LPs generally cannot exit current funds, they can forgo investing in future funds, which may serve as a disciplining mechanism. ...
Article
Private equity (PE) funds are increasingly important to the economy and now serve as the primary vehicle for raising new capital. However, a limited understanding of the unique PE fund setting among accounting academics inhibits accounting research in this area. In this paper, we first describe the PE fund setting and explain how fundamental differences between PE and previously studied settings make it difficult to infer PE fund behavior from research performed using other settings. We then discuss how PE funds provide researchers with the ability to explore fundamental questions related to agency costs, governance, compensation, disclosure, and fair value accounting. Finally, we provide guidance on PE data sources available for use in future research. Because of the volume of economic activity currently funneled through PE and the unique aspects of the PE setting, it is important for researchers to explore when, why, and how accounting matters for PE funds. Data Availability: Data used in this study are available from the public sources identified in the text. JEL Classifications: G1; G14; G30; M4; M41.
... We also note that our analysis focuses on equity investors who are involved at entry, while some studies include investors who join at later stages. The attributes of grand-standing and impatience that often characterize equity investors (Gompers, 1996;Gompers & Lerner, 2004;Mazzucato, 2018) may vary depending on when they invest, and if so, seed and pre-seed investments are probably a category on their own for financial operators (e.g., Klingler-Vidra, 2016) and may respond to a different, more patient, logic. Future research could enlighten us in this regard. ...
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Plain English Summary Hiring is challenging for start-ups and not all manage to hire personnel beyond the founders in nascent stages. We show that the odds of early-stage hiring are higher when innovation-driven start-ups secure certain competences and resources at entry. We build on the resource- and competence-based views of the firm and on signaling theory to explain how certain competences assembled at entry can explain differences in start-ups’ early hiring rates. We show that founders with previous entrepreneurial experience and backed by particular shareholders (incumbent firms or universities) are more likely to hire employees in early stages, especially when running innovation-driven startups. These competences and resources, when coupled with an innovation orientation, can make a difference by either expanding the firm’s resources to hire or encouraging prospective employees to join in the early stages of the firm. These findings have important implications for research and practice. They uncover the important role of initial resources in increasing a start-up’s hiring propensity, unravel the contingent role of the firm innovation strategy, and shed light on a channel (i.e., early-stage hiring) through which founding conditions may affect start-up performance.
... Furthermore, VC firms with a good reputation find it easier to engage in syndication (e.g., Lockett and Wright, 2001). Reputation is so important to VC firms that nascent VC firms tend to stimulate their portfolio ventures to go public earlier than more experienced firms to increase their reputation and gain legitimacy (e.g., Gompers, 1996). Simultaneously, entrepreneurs are willing to give their shares to reputable VC firms at a lower price (Hsu, 2004). ...
Article
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An entrepreneur’s digital identity matters for resource acquisition and venture development. However, we know little about the factors that influence or change entrepreneurs’ digital identities. This study explores how entrepreneurs’ digital identities change after a venture capital (VC) funding round. Applying a language-based text analysis to a large sample of tweets from 2,094 US entrepreneurs, we analyze entrepreneurs’ digital identities before and after VC funding. The results of our analysis show that VC funding can impact the entrepreneur’s digital identity in both a positive and a negative way. On the positive side, entrepreneurs increasingly use language indicative of higher self-confidence, positive emotions, and increased professionalism. On the negative side, we find that the entrepreneur’s digital identity loses its authenticity, particularly with high funding amounts raised. The latter can be problematic as authenticity is shown to be a critical resource that entrepreneurs possess to build legitimacy and engage stakeholders in their venture. Our study contributes to research on the consequences of VC funding for entrepreneurs as well as to research on entrepreneurial digital identities. Practical implications exist for entrepreneurs managing their entrepreneurial identities over the course of venture development.
... Previous-round VCs reputation, as a strong signal originating from VCs in earlier financing rounds, indicates the quality and potential capability of the focal digital startup. Venture capitalist reputation has been operationalised differently in previous research (Gompers, 1996;Krishnan et al., 2011;Lee & Wahal, 2004), where a higher reputation is associated with stronger capabilities in handling regulatory legitimacy issues, greater VC involvement in the development process of the startup, and superior portfolio firm performance (Gompers & Lerner, 1999;Ko & McKelvie, 2018;Krishnan et al., 2011). To measure previous-round VCs reputation, we use the mean value of capital under management of all VC firms invested in the focal startup in first-round financing. ...
Article
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This paper addresses how weak and strong signals affect venture capital funding acquired by digital startups at their early stage in various industries of China. We also articulate the interaction mechanism of these strong and weak signals by demonstrating their complementary or substitutive effects in alleviating information asymmetry on startup quality, which can help digital startups secure venture capital financing. Drawing on signalling theory and institutional legitimacy theory, we introduce application (app) downloads as a novel strong signal that can reduce market legitimacy concerns, and previous‐round venture capitalist reputation as a traditional strong signal that mitigates regulatory legitimacy concerns. We treat founders' startup and IT experience as weak signals, as they provide rhetorical and indirect information indicating a startup's potential to establish regulatory and market legitimacy. The study empirically investigates our hypotheses using data of 163 digital startups in various industries of China. Results confirm the positive relationships between strong signals and venture capital funding secured by a digital startup. Furthermore, signals of similar strength are found to complement each other's effects in certain situations, while strong signals can reduce the effects of weak signals on a digital startup's financing performance under specific conditions that create these mixed effects. Implications for digital startup research and practice as well as limitations and suggestions for future research are discussed.
... Second, they are attractive partners for syndication and therefore can more easily spread the risk of potentially attractive investments across multiple partners (Lerner 1994, Plagmann andLutz 2019). Conversely, low reputation VC investors need to "grandstand" to be able to raise more capital from prospective limited partners (Gompers 1996, Nanda et al. 2020) and thus are discouraged by the high risk and long-term payoff inherent in investing in young firms with radical patents. In summary, the aim of this paper is to investigate how the receivers of signals react to strong signals with a dark side, i.e., which types of VC investors are attracted to startups that have patents on radical inventions and how they design those deals. ...
Article
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Patents are an important signal of the unobserved quality of young, innovative firms. We study patents that protect radical inventions associated with high earnings potential but also a high risk of failure. These previously disregarded signals convey positive and negative information simultaneously, i.e., strong signals that have a dark side. We argue that whether firms that send such signals are attractive investment targets for venture capital (VC) investors depends on the characteristics of the investors. Reputable VC investors are attracted to the strong quality signals of patents protecting radical inventions and are better able than other VC investors to deal with the dark side of these signals through syndication. These effects are stronger in the first financing round than in follow-on rounds, as the (positive and negative) informational value of patents protecting radical inventions diminishes over time as information asymmetries between young firms and prospective VC investors are reduced. We test these predictions using a sample of 759 young life science firms and 555 VC investors. Econometric estimates from a matching model support our predictions.
... Bayar and Chemmanur (2011) ascribe this premium to differences in firm quality, especially with regard to their long-term growth potential. Due to their governance structure as a limited partnership, IVC investors are prone to taking their portfolio companies public earlier so they can "grandstand" and attract more private money for their upcoming funds (Gompers, 1996). When it comes to exit support, IVC investors can make use of their strong ties to the financial industry and access to their co-investment network (Hochberg et al., 2007). ...
Article
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Purpose Literature on entrepreneurial finance has long overcome the view of an investor as a sole provider of financial capital. Entrepreneurs need to consider more aspects when deciding on an investor. Especially the depiction of corporate venture capital (CVC) investors has long highlighted advantages and disadvantages compared to independent VC (IVC) investors. The authors investigate what drives entrepreneurs' preferences for CVC relative to IVC and thereby focus on two key issues in the entrepreneur's consideration – the role of resource requirements and exit strategies. Design/methodology/approach The data were collected in an online survey that gathered information on several characteristics of entrepreneurs and their ventures. The resulting data set of 105 German entrepreneurs was analyzed using logistic regression and revealed important drivers for entrepreneurs' investor preferences. Findings The study’s findings confirm that the venture's resource needs, specifically the need for marketing resources and access to the corporate network, which play a significant role in the decision on whether a CVC or IVC investor is preferred. Moreover, the analysis debunks the hypothesis that entrepreneurs view a CVC investment as the first step toward acquisition. However, those entrepreneurs striving for an IPO are less likely to prefer CVC. Originality/value The study expands the literature on CVC attractiveness and specifically considers the entrepreneurs' intentions and needs. The results confirm but also debunk some widespread perceptions about why entrepreneurs choose to pursue financing from a CVC investor.
... (1) [24,55,56] . Ù VC ¹±« ÔÑ Ä¨AE¡, « ´: [37,60,66,70] . ...
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Whether Venture Capital (VC) can screen out high-quality enterprises to invest and promote their performance is an important indicator to judge whether the venture capital industry in emerging markets is mature or not. Research on this problem in the Chinese market is scarce. Based on the sample of China's GEM listed companies, this paper tries to explore whether VC can screen out high-quality enterprises, whether it can bring performance improvement to the invested companies, and further explore its mechanism. The results show that: (1) based on the logistic regression, VC may not be able to screen out high-quality enterprises, showing that the regression coefficient of enterprise performance variables is not significant; (2) based on fuzzy regression discontinuity, VC can promote the development of the invested enterprise, and has a positive effect on the performance improvement of the invested enterprise; (3) VC can affecting the performance of the enterprise from the perspective of operational efficiency and innovation: on the one hand, VC reduces the sales cost rate and improves the operating efficiency of the enterprises; on the other hand, the entry of VC brings industry experience and resources to the invested enterprises, promotes their innovation of technology or business model, and thus help them to improve the business performance. The empirical findings show that domestic VC has the function of "value-added" and create economic value, but it has no "screening" effect. It reveals the impact of VC on the performance of the invested and its potential mechanism, which provides a new empirical reference for VC’s function, and have reference value for enterprises, venture capital institutions and policy makers.
... Due to the fact that when partners have a positive view of a company, they are often more willing to share resources with that firm, Lange et al. argued that companies use signals of a firm's excellence to convince third parties of its potential (Lange et al. 2001). Researchers have identified a number of indicators that act as pre-IPO signals for the firms, such as third-party affiliations, such as venture capital-backed companies (Gompers 1996;Kirkulak 2008;Ragozzino and Blevins 2016), investment bankers (Jain and Kini 1999;Daily et al. 2005;He 2007), and business partners (Stuart et al. 1999;LiPuma 2012;Peng et al. 2021), which can be useful signals for outside investors. Companies also signal their reputation using (Jelic et al. 2001;Dong et al. 2011;Su and Bangassa 2011), CEO background (Certo et al. 2007;Yang et al. 2011), and the size and qualifications of the top management team (Higgins and Gulati 2006) during the IPO process to improve IPO success by reducing information asymmetry. ...
Article
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This study investigates whether patents can be a useful signaling tool for the IPO performances among high- and low-tech firms. Literature has provided a wealth of evidence confirming a significant relationship between patent signal and capital-raising success for US and EU venture capital-backed firms and start-ups in specific industries. Therefore, this paper focuses on the IPO firms from a more risk-averse market, Japan, to fill in the gaps in the literature, examining the signaling effect of patent applications prior to initial public offering (IPO) to the amount raised at IPO. Moreover, we examine whether patent applications prior to IPO from high-tech have relatively weaker signaling effects to compare with low-tech IPOs. Using the OLS model for 338 Japanese IPOs listed between 2000 and 2015, the result shows a robust and positive association between the number of patents before an IPO and the amount of cash raised during the IPO. The finding confirms that patents are a reliable signal for IPOs in the Japanese context. Using OECD industry categorization to classify high-tech and low-tech IPOs, our OLS result found that the interaction impact between the high-tech dummy and the quantity of patent applications before IPO is significantly negative to the amount of cash generated at IPO. The findings hold for a new set of high-tech and low-tech firms when we used a new industrial categorization proposed by Thomson Reuters, leading us to conclude that for the Japanese companies that belong to the high-tech industry sector, patenting activities fail to have a positive signal for the IPO.
... The VC reputation was previously studied by Gompers (1996) while BAs focus will remain on their IPO venture. ...
Thesis
The paper is an attempt to introduce the pros and cons of going public against the decision to stay private. In studying the alternatives that Lebanese enterprises face when it comes to finding the most suitable funding sources, the researcher found that they follow a modified Pecking order (POT) which limits the funding sources short of equity issuance. The corporate financing in Lebanon is mostly covered by debts in the form of borrowings from banks and some credit from suppliers. I focused on the behavior of private firms in Lebanon, other sources of funds, such as private equity from the public, were absent in the past 25 years. The Lebanese firms have adequate amounts of internal cash flows to finance their investment needs. Among the external financing, the equity and bond markets in Lebanon are inefficient with very limited role. The short-term nature of private firms' loans reveals the dependence on external funding from commercial banks. On the other hand, the Lebanese firms do not support the effect of the size and age on the choice of external financing which cannot be explained by these two variables with low correlation. Once the internal sources have been depleted, firms will be under the scrutiny of going public based on the expected and perceived costs of doing so and being public ultimately. In order to facilitate the decision to go public, the researcher tried to shed the light on the cost of going public and being a publicly listed company in Lebanon with emphasis on Beirut Stock Exchange (BSE) rules and regulations. A road map was introduced and a simulation was formulated to assist the potential enterprises wishing to go public. Therefore, the benefit of going public should be weighed against the initial and ongoing cost of being public. Firms must decide carefully on the capital needed to be raised from the IPO. firms with an intention to go public must weigh in the benefits from such listing against the cost of listing and the ongoing costs of being listed.Going back to being private is presented as an ultimate choice that ranges from delisting to going dark or simply a partial or complete share repurchase. “Why do firms go back private after being public?” is an important question that requires a thorough study as it became a trend over the past two decades. The researcher had to look for more active markets such as the Paris Stock Exchange to explain this corporate action and to shed the light on the possible reasons and the reversibility of any going public decision. For this, the Association des Marchés Financiers (AMF), Bloomberg terminal, the World Federation of Exchanges (WFE) and the Euronext were consulted to highlight the importance of such a corporate move. Over the study horizon of 20 years, around 2226 firms left the French market according to Bloomberg terminal data. The majority of the firms that opted to quit the listed status are represented in the small capitalization firms that are burdened by the high cost of being listed and foreign firms that are looking to concentrate their listing in one venue or one market (reduce cross-listing costs) where liquidity of their stock and benefits of being listed is more efficient. One can see delisting as a reaction to the lack of liquidity in the respective market where the stock is listed or to the high cost to being listed.
... 4 The resource depletion degree is one major determinant of the design and implementation of the FITs policy. 5 VC expertise factors, such as the VC age and VC investment capital, are documented to increase the performance of VC noncleantech investments, through value-adding monitoring and due diligence activities (Lerner 1994;Gompers 1996;Sørensen 2007;Hochberg et al. 2007;Nahata 2008). 6 The high cultural distance indicator variable equals 1 if the Hofstede cultural distance between the home country of cleantech start-ups and that of the lead VC firm is in the highest Hofstede cultural distance quantile, and 0 otherwise. ...
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This paper explores the strategies and practices of capturing climate risk premia for venture capital (VC) fund managers and entrepreneurs in the private cleantech sector. It also examines the impact of the feed-in tariffs (FITs) policy on the management of cleantech investments. It is shown that a longer investment period, less investment capital in cleantech investment management strategies, and optimistic climate risk management practices will help investors to better capture climate risk premia. In fact, the FITs policy will give rise to VC fund managers and entrepreneurs having a positive view regarding the prospects of the cleantech sector, motivating them to make long-term investments. Furthermore, it is shown that the greater the impact of the FITs policy, the greater the climate risk premia to be captured. In addition, the captured climate risk premia are greater in weaker economic conditions and in times of increased uncertainty with regard to product demand.
... A few studies have look at the relationship between PE fund age and performance which we will also examine in this article. Gompers (1996) argues that new PE funds have a higher propensity to take risks at an early stage to develop their brand and reputation. Gompers, Kovner, Lerner, and Scharfstein (2008) posit that more experienced funds have an advantage because they can make superior investment decisions in changing public market conditions without impacting performance. ...
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We analyse the effect of geographical diversification on global private equity fund returns and find a negative correlation between the two. To establish causality between geographical diversification and private equity fund returns, we use an instrumental variable analysis, in which the instrument is the stock market capitalisation in the country where the private equity fund is based. Our results apply to the net internal rate of return, total value over paid-in and distributions over paid-in capital. Fund age and industry diversification mitigate the negative correlation. The relationship between geographical diversification and private equity fund returns follows an inverted U-shaped function.
... Over-investment in R&D may occur, for example, as a result of high bargaining power executives extorting preferential capital budgeting allocations towards weaker business divisions (Scharfstein and Stein, 2000), executives becoming entrenched in "pet projects" (Nohria and Gulati, 1996), or executives attempting to derive heightened status from such activities (e.g. Gompers, 1996). PRINTED One approach that principals, such as hedge funds, can employ to motivate a company's executives to act in the best interest of the shareholders is through direct intervention. ...
Article
The Oxford Handbook of Hedge Funds provides a comprehensive look at the hedge fund industry from a global perspective. The chapters are organized into five main parts. After the introductory chapter in Part I, Part II begins in Chapter 2 with an analysis of the main factors that have affected the operation of hedge funds. Chapter 3 explains the concept of hedge fund flows. Chapter 4 examines hedge fund manager fees and contracts. Part III focuses on different types of hedge fund strategies. The broad array of strategies are summarized in Chapter 5. Chapter 6 empirically examines the performance of hedge fund strategies. Chapter 7 compares the strategies of hedge funds to private equity funds. Chapter 8 examines hedge fund herding. Chapter 9 examines hedge fund commodity trading advisors and leverage. Chapter 10 examines financial technology in hedge fund strategies. In Part IV, hedge fund activism in the US is examined in Chapter 11. The US and international literature on hedge fund activism is reviewed in different perspectives in Chapters 12 and 13. Case studies are provided in Chapter 14. The impact of activism on large company innovation is discussed in Chapter 15. In Part V, Chapter 16 examines whether hedge funds may engage in misreporting and fraud. Chapter 17 reviews work on hedge fund misconduct and detection. Chapter 18 discusses compliance among hedge funds. Chapter 19 examines theoretical approaches to hedge fund regulation. Chapter 20 examines optimal taxation. Chapter 21 examines hedge funds from a political economy context.
... Another stream of literature has addressed the influence of VC characteristics, such as reputation, on the intensity of VC involvement (e.g. Gompers, 1996) and VCs' selection behaviour (e.g. Knockaert and Vanacker, 2013). ...
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Purpose This paper aims to adopt a practice-theory, “site ontology” perspective to understand how venture capitalists (VCs) add value to their portfolio companies (PCs). Design/methodology/approach The empirical research involves a field ethnographic study of a VC firm in Dubai, focused on revealing what constitutes value and what VCs do to add this value to their PCs. Findings Value adding is a profoundly social, embedded process interconnected with other ecosystem actors, investment practices and organizations. The value adding threads of VC activity are part of a holistic configuration of practices that span the investment lifecycle and different levels within the firm. Originality/value This research contributes a rich account of the social, symbolic nature of VC activity, depicting the everyday activities that comprise value adding practices. It is among the first to introduce practice theory to the VC context and open up a new conversation about its social ontology.
... The emergence of venture capital funds, venture capital analysis, specifics of venture capital investment, venture capital investment stages, and the impact of venture capital on innovative activities have been extensively reviewed in the works of the scientists of the Massachusetts Institute of Technology P. Gompers and J. Lerner (Gompers, 1996). ...
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The article covers the role of innovative-investment processes in innovative development of the national economy and explores the sources of investment in innovative enterprises, venture capital and business ventures, the system of venture capital investments, and the structure of venture capital funds.
... In addition, while we find VC/PE backing as the third important determinant variable in underpricing with negative impact on underpricing, there are mixed results in the literature about the impact of this variable on underpricing. For example, Gompers (1996) provides evidence that IPOs backed by young venture capital firms are more underpriced, whereas Liu and Ritter (2011) report an opposing result; that is, IPOs covered by more reputable analysts have a higher initial return. Moreover, although the lock-in variable has a trivial effect in our nonlinear model, Reber and Vencappa (2016) document a significant coefficient (both statistically and economically) for this variable in their linear model. ...
... (1985, Mansfield and Switzer, (1985), McMurtry (1986), Poterba (1989), and Summers (1989). More recent litera ture includes, among others, Admati and Pfleiderer (1994), Allen and Gale (1994), Berglof (1994), Chemmanur and Fulghieri (1999), Espenlaub (1999), Gompers (1993Gompers ( , 1995Gompers ( , 1996, Lemer (1997, 1999), Lemer (1994Lemer ( , 1995, Mason and Harrison (1999), Murray (1999), Reynolds and White (1997), Rich and Gumpert (1992), and Smith and Smith (2000). ...
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Status dynamics play a critical role in venture capital (VC) syndication. Prior research on multiparty syndicates has shown how status differences among current syndicate members affect how the syndicate searches for new investors in later investment rounds. However, it is unclear how potential newcomers evaluate whether or not to join a syndicate based on the degree of status disparity among current syndicate members. We adopt an alter-centric approach by examining how an existing syndicate’s status disparity affects a potential newcomer’s willingness to join. For potential newcomers, we contend that syndicate status disparity is a double-edged sword, both deterring newcomers due to low perceptions of syndicate trust while simultanously attracting newcomers at the prospect of accessing diverse future investment opportunities. Whether the perceived costs of syndicate status disparity outweigh the perceived benefits for newcomers depends upon the degree of risk associated with the venture deal. Across two studies—a field experiment of 193 institutional investors and an archival study of 3,644 multiparty syndicates—we found that newcomers are attracted to syndicate status disparity when deal risk is low but deterred from syndicate status disparity when deal risk is high. Our paper highlights how newcomer additions to multiparty syndicates entail a complex interplay between features of co-investors and features of the venture deal.
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We analyze the initial intellectual property (IP) decisions of 336 start-ups in IP-intensive industries in China, distinguishing among patents, trademarks, and IP portfolios. Our empirical results show that the initial IP decisions of start-ups have an impact on their innovation performance. Compared with start-ups that choose trademarks or patents, start-ups that choose IP portfolios have higher financial and non-financial innovation performance. Furthermore, venture capital positively moderates the relationship between initial IP decisions and non-financial innovation performance. VC-backed start-ups that choose IP portfolios are more likely than other start-ups to achieve higher non-financial innovation performance. Finally, strategic planning also plays a role in the relationship. Among the start-ups that choose IP portfolios, those with high strategic planning gain higher non-financial innovation performance. This paper contributes to research on initial IP decisions in entrepreneurial contexts by incorporating IP portfolios to initial IP decisions and uncovering the role of initial IP decisions in innovation performance.
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This study investigates the effect of historical military conflict (between the home countries of venture capital (VC) firms and portfolio companies) on the performance of cross‐border VC investments. Using exhaustive data on global cross‐border investments during 1986–2017, we find that adverse memories imprinted by historical military conflict have a negative effect on cross‐border performance as measured by internal rate of return and public market equivalent. We show that nation‐dyadic (i.e. political affinity) and ownership control strategy (i.e. board seat and syndication)‐related contingencies moderate the relationship between historical military conflict and cross‐border performance. Collectively, our findings shed light on the presence of intergroup interaction challenges and mistrust when investing in cross‐border VC deals and demonstrate channels to mitigate their adverse effects.
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Venture capital (VC) models can be optimized with emerging decentralized technology. There are many disadvantages that come with traditional VC fundraising including illiquidity and ownership struggles, as well as timing. This paper will discuss alternative funding mechanisms that may be available and advantageous to emerging businesses. After discussing the shortcomings of the existing VC market and the rise of alternative early round funding mechanisms, the paper highlights the evolution of VC businesses that are operated by a Decentralized Autonomous Organization (DAO). More specifically, models discussed in this article contribute to the much-needed experimentation with venture capital reputation models.
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We examine the effect of short sellers on corporate innovation. To establish causality, we use a policy experiment that exogenously removes the short-selling constraint for a randomly selected subsample of Russell 3000 firms. We find that innovation quality, value, and efficiency of treatment firms improve significantly more than those of control firms surrounding the policy shock. The exposure to patenting-related litigation initiated by short sellers is a plausible underlying mechanism through which short sellers discipline firm managers and enhance innovation. Our paper provides new insights into an unintended real effect of short sellers, specifically their improvement of technological innovation. (JEL G14, G18, G34, K22, O31, O32) Received December 10, 2018; editorial decision February 12, 2023 by Editor Andrew Ellul. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
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Using an international sample of IPO firms and two country-level measures of financial literacy, we find strong evidence that financial literacy is negatively associated with IPO underpricing. In cross-sectional analyses, we find that the effect of financial literacy in reducing IPO underpricing is more pronounced when the information environment is less transparent. Employing path analysis, we document that information friction, firm transparency, and stock market participation are mechanisms that mediate this relationship. Our study contributes to and extends the literature by providing strong evidence that citizens’ financial literacy has an important and consistent influence on IPO underpricing.
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This study investigates venture capital (VC) reputation impact on the pre-IPO performance of the entrepreneurial firms backed by three kinds of VCs. This study employs backward stepwise regression models following prior theoretical frameworks to examine the research question. Based on a database of the top 50 VC firms ranked during 2016 to 2020 and their portfolio firms. This study shows some contingent contribution to pre-IPO firm performance. Firstly, the reputation of the Chinese government-owned VCs is negatively associated with their portfolio firm performance. Still, there is a positive relationship between foreign and local private VCs. Secondly, entrepreneurial firm performance is significantly associated with industry policy and entrepreneur’s performance than VC reputation. This study has practical implications for entrepreneurs and limited partners regarding their corporation relationships with the Chinese VCs. JEL codes: G24, G34
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We explore the interplay between homophilic preferences, reciprocity, and societal values in the formation of venture capital investment syndicates in China. Both Chinese and U.S. syndicate lead firms generally prefer including their fellow compatriot firms over comparable non-compatriots in the investment syndicates that they assemble. When a Chinese firm initiates a collaborative first move by including a U.S. firm in an investment syndicate, however, the U.S. firm no longer prefers comparably familiar U.S. firms over the Chinese firm when it subsequently chooses among prospective syndicate partner firms to include in its investment syndicates. In such cases, familiarity triggers impartiality; the experiential trust that was garnered from the collaborative first-move engagement initiated by the Chinese firm diminishes the nationality-based homophilic preferences of the U.S. firm. We do not find similar dynamics when the tables are turned. When a U.S. firm initiates a collaborative first move by including a Chinese firm in an investment syndicate, the Chinese firm subsequently remains partial to fellow compatriot firms that are otherwise comparable to the U.S. firm. The homophilic preferences and identity-based trust between Chinese firms grounded in shared nationality are resilient to any goodwill created by U.S. firms when they initiate collaborative first moves.
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In this article, we examine the role of domestic and foreign venture capital and private equity (VCPE) firms in India. We find robust evidence that portfolio firms backed by foreign VCPE firms incorporate effective governance structures after the initial public offering (IPO). Specifically, these firms are associated with smaller, more independent, and gender‐diverse boards. Furthermore, our results suggest that foreign VCPE firms continue their association with their portfolio firms in the post‐IPO period by nominating directors to the boards. Our results also suggest that portfolio firms backed by foreign VCPE firms are associated with better long‐term operating performance and profitability. This positive effect is exacerbated by the presence of independent and female directors. Collectively, our results support the view that good governance practices are key to the long‐term success of a business, especially in economies that lack good legal systems, developed financial markets, and alternative investment opportunities and where developing trust between parties in a transaction is crucial. This article is protected by copyright. All rights reserved.
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Venture capitals (VCs) often do not withdraw upon initial public offerings (IPOs) but continue to have impacts on firm financing behaviour. Through a proprietary dataset of 21,811 firm-year observations on the Shanghai and Shenzhen Stock Exchanges between 2009 and 2018, we examine the impact of VC backup on firm access to bank loans and the underlying mechanism. We confirm that VC backup has significant and positive impact on firm access to bank loans, both short-term and long-term. However, our mechanism tests suggest that the impact, different from current literature, is from VC's state ownership but not from governance or certification effect. Furthermore, rather than state-owned enterprises (SOEs), VC's impact only exists among private firms. VC's state ownership may significantly contribute to firm's better access to bank loans. Our findings are robust after controlling fixed effects, missing variables, sample selection bias, reverse casualties, or other endogeneity issues.
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We test if California VCs significantly outperform VCs from other US states. We additionally test in which instances California VCs outperform the other VC concentrated states of Massachusetts and New York. We find that VCs from California, Massachusetts, and New York have significantly greater probabilities of successfully exiting their investments than VCs from other states. Additionally, we show that California VCs are even more adept than VCs from Massachusetts and New York at 1. Early-stage investments, 2. Helping their entrepreneurial firms receive future rounds of financing, and 3. Helping their backed entrepreneurial firms receive higher IPO valuations and achieve superior post-IPO accounting ratios. Additional results suggest that VCs from California, Massachusetts, and New York are not only adept at selecting firms in which they invest in and continue to invest in, but they also enhance the value of the firms they select by means of monitoring their investments.
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We investigate the implications for serial entrepreneurs in terms of IPO valuation. Using the sample of 2,017 firms that went public in U.S. between 1998 and 2017, our findings show that the positive impact of board members’ entrepreneurial track record on the the valuation of IPO is more salient in young and mid-age firms. Moreover, small and medium-sized businesses benefit more from entrepreneurial expertise than large corporations. Finally, the relation between an established track record and IPO valuation is more significant for firms with venture capital backing.
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The US entrepreneurial finance market has changed dramatically over the last two decades. Entrepreneurs who raise their first round of venture capital retain 30% more equity in their firm and are more likely to control their board of directors. Late-stage start-ups are raising larger amounts of capital in the private markets from a growing pool of traditional and new investors. These private market changes have coincided with a sharp decline in the number of firms going public—and when firms do go public, they are older and have raised more private capital. To understand these facts, we provide a systematic description of the differences between private and public firms. Next, we review several regulatory, technological, and competitive changes affecting both start-ups and investors that help explain how the trade-offs between going public and staying private have changed. We conclude by listing several open research questions.
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This paper proposes a new proxy for the ex ante expectations of issuers and their underwriters about the direction of pricing revisions during the roadshows of an initial public offering (IPO): the way issuers elect to calculate the registration fees owed to the Securities and Exchange Commission. Consistent with fee‐minimizing decision‐making, I find that the choice of fee calculation method is associated with pricing revisions and IPO underpricing. This relationship suggests that issuers or their advisors may not incorporate economically significant private valuation information into the initial pricing range estimate and initial public offering price. The results provide empirical support for theoretical models of partial adjustment and IPO underpricing driven by the preferences of underwriters or managers of issuers for underpriced IPOs.
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This paper studies reputation formation and the evolution over time of the incentive effects of reputation to mitigate conflicts of interest between borrowers and lenders. Borrowers use the proceeds of their loans to fund projects. In the absence of reputation effects, borrowers have incentives to select excessively risky projects. If there is sufficient adverse selection, reputation will not initially provide improved incentives to borrowers with short credit histories. Over time, if a good reputation is acquired, reputation will provide improved incentives. General characteristics of markets in which reputation takes time to work are identified. Copyright 1989 by University of Chicago Press.
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The underpricing of initial public offerings that has been widely documented appears to be a short-run phenomenon. Issuing firms during 1975-84 substantially underperformed a sample of matching firms from the closing price on the first day of public trading to their three-year anniversaries. There is substantial variation in the under performance year-to-year and across industries, with companies that went public in high-volume years fairing the worst. The patterns are consistent with an initial public offering market in which (1) investors are periodically overoptimistic about the earnings potential of young growth companies, and (2) firms take advantage of these "windows of opportunity." Copyright 1991 by American Finance Association.
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This paper presents a model for the underpricing of initial public offerings. The argument depends upon the existence of a group of investors whose information is superior to that of the firm as well as that of all other investors. If the new shares are priced at their expected value, these priveleged investors crowd out the others when good issues are offered and they withdraw from the market when bad issues are offered. The offering firm must price the shares at a discount in order to guarantee that the uninformed investors purchase the issue.
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This paper examines the timing of initial public offerings and private financings by venture capitalists. Using a sample of 350 privately held venture-backed biotechnology firms between 1978 and 1992, I show that these companies go public when equity valuations are high and employ private financings when values are lower. Seasoned venture capitalists appear to be particularly proficient at taking companies public near market peaks. The results are robust to a variety of controls and alternative explanations.
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Empirical evidence suggests the existence of ‘hot-issue’ markets for initial public offerings: in certain periods and in certain industries, new issues are underpriced and rationing occurs. This paper develops a model consistent with this observation, which assumes the firm itself best knows its prospects. In certain circumstances, firms with the most favorable prospects find it optimal to signal their type by underpricing their initial issue of shares, and investors know that only the best can recoup the cost of this signal from subsequent issues.
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Venture-capital organizations raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk. This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationship between investors and venture capitalists and between venture-capital firms and the ventures in which they invest. The agency problems in these organizations and to the contracts and operating procedures that have evolved in response are emphasized. Venture-capital organizations are contrasted with large, publicly traded corporations and with leveraged buyout organizations.
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Thesis (Ph. D.)--Harvard University, 1993. Includes bibliographical references (leaves 142-149). Microfilm.
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This paper examines the familiar argument that takeover pressure can be damaging because i t leads managers to sacrifice long-term interests in order to boost c urrent profits. If stockholders are imperfectly informed, temporarily low earnings may cause the stock to become undervalued, increasing t he likelihood of a takeover at an unfavorable price; hence the manage rial concern with current bottom line. The magnitude of the problem d epends on a variety of factors, including the attitudes and beliefs o f shareholders, the extent to which corporate raiders have inside inf ormation, and the degree to which managers are concerned with retaini ng control of their firms. Copyright 1988 by University of Chicago Press.
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This paper examines covenants in 140 partnership agreements establishing venture capital funds. Despite the similar objectives and structures of these funds and the relatively limited number of contracting parties, the agreements are quite heterogenous in their inclusion of covenants. We examine two complementary hypotheses that suggest when covenants will be used. Covenant use may be determined by the extent of potential agency problems: because covenants are costly to negotiate and monitor, they will only be employed when these problems are severe. Alternatively, covenant use may reflect the supply and demand conditions in the venture capital industry. The price of venture capital services may shift if the demand for venture funds changes while the supply of fund managers remains fixed in the short run. The evidence suggests that both factors are important. This is in contrast to previous studies which have either focused exclusively on costly contracting or provided only weak support for the effects of supply and demand on contracts.
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This paper develops a model of inefficient managerial behavior in the face of a rational stock market In an effort to mislead the market about their firms' worth, managers forsake good investments so as to boost current earnings. In equilibrium the market is efficient and is not fooled: it correctly conjectures that there will be earnings inflation, and adjusts for this in making inferences. Nonetheless, managers, who take the market's conjectures as fixed, continue to behave myopically. The model is useful in assessing evidence that has been presented in che “myopia” debate. It also yields some novel implications regarding firm structure and the limits of intergation.
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One measure of the health of the Social Security system is the difference between the market value of the trust fund and the present value of benefits accrued to date. How should present values be computed for this calculation in light of future uncertainties? We think it is important to use market value. Since claims on accrued benefits are not currently traded in financial markets, we cannot directly observe a market value. In this paper, we use a model to estimate what the market price for these claims would be if they were traded. In valuing such claims, the key issue is properly adjusting for risk. The traditional actuarial approach – the approach currently used by the Social Security Administration in generating its most widely cited numbers - ignores risk and instead simply discounts “expected†future flows back to the present using a risk-free rate. If benefits are risky and this risk is priced by the market, then actuarial estimates will differ from market value. Effectively, market valuation uses a discount rate that incorporates a risk premium. Developing the proper adjustment for risk requires a careful examination of the stream of future benefits. The U.S. Social Security system is “wage-indexedâ€: future benefits depend directly on future realizations of the economy-wide average wage index. We assume that there is a positive long-run correlation between average labor earnings and the stock market. We then use derivative pricing methods standard in the finance literature to compute the market price of individual claims on future benefits, which depend on age and macro state variables. Finally, we aggregate the market value of benefits across all cohorts to arrive at an overall value of accrued benefits. We find that the difference between market valuation and “actuarial†valuation is large, especially when valuing the benefits of younger cohorts. Overall, the market value of accrued benefits
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This paper examines a potential agency conflict between mutual fund investors and mutual fund companies. Investors would like the fund company to use its judgment to maximize risk-adjusted fund returns. A fund company, however, in its desire to maximize its value as a concern, has an incentive to take actions that increase the inflow of investments. We use a semiparametric model to estimate the shape of the flow-performance relationship for a sample of growth and growth and income funds observed over the 1982-92 period. The shape of the flow-performance relationship creates incentives for fund managers to increase or decrease the riskiness of the fund that are dependent on the fund's year-to-date return. We examine portfolio holdings of mutual funds in September and December and show that mutual funds do alter the riskiness of their portfolios at the end of the year in a manner consistent with these incentives.
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This paper examines the structure of staged venture capital investments when agency and monitoring costs exist. Expected agency costs increase as assets become less tangible, growth options increase, and asset specificity rises. Data from a random sample of 794 venture-capital-backed firms support the predictions. Venture capitalists concentrate investments in early stage and high technology companies where informational asymmetries are highest. Decreases in industry ratios of tangible assets to total assets, higher market-to-book ratios, and greater R&D intensities lead to more frequent monitoring. Venture capitalists periodically gather information and maintain the option to discontinue funding projects with little probability of going public. Copyright 1995 by American Finance Association.
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This paper provides support for the certification role of venture capitalists in initial public offerings (IPOs). Consistent with the certification hypothesis, a comparison of venture capital backed IPOs with a control sample of nonventure capital backed IPOs from the 1983 through 1987 matched as closely as possible by industry and offering size indicates that venture capital backing results in significantly lower initial returns and gross spreads. In effect, the presence of venture capitalist in the issuing firms serves to lower the total costs of going public and to maximize the net proceeds to the offering firm. In addition, the authors document that venture capitalists retain a significant portion of their holdings in the firm after the IPOs. Copyright 1991 by American Finance Association.
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Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.
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This paper examines the returns earned by subscribing to initial public offerings of equity. K. Rock (1986) suggests that initial public offerings of equity returns are required by uninformed investors as compensation for the risk of trading against superior information. The authors show that initial public offerings of equity with more informed investor capital require higher returns. The marketing underwriter's reputation reveals the expected level of "informed" activity. Prestigious underwriters are associated with lower risk offerings. With less risk there is less incentive to acquire information and fewer informed investors. Consequently, prestigious underwriters are associated with initial public offerings of equity that have lower returns. Copyright 1990 by American Finance Association.
Article
This paper uses a natural experiment approach to identify the effects of an exogenouschange in future pension benefits on workers’ training participation. We use uniquematched survey and administrative data for male employees in the Dutch public sectorwho were born in 1949 or 1950. Only the latter were subject to a major pension reformthat diminished their pension rights. We find that this exogenous shock to pension rightspostpones expected retirement and increases participation in training courses amongolder employees, although exclusively for those employed in large organizations.
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Explores the nature of the venture capital investment through examination of initial public offerings (IPOs). Venture capitalists are often active investors who participate in management of the firms. The venture capital investment can be ended in a variety of ways, with the sale of the company's shares through a public offering being the most prevalent. Data used in the analysis includes 433 IPOs that were backed by venture capitalists from 1978 to 1987 and 1,123 IPOs without such backing. Results show that venture capitalists tend to focus on certain industries, in order to develop an expertise. In this case, the focus was on computer equipment, electrical and electronic components, instrumentation, and business services. The median offering size of firm IPOs backed by venture capitalists was larger than the size of those not backed. Based on analysis of the full sample, it appears that venture capitalists are able to bring public the firms they back earlier than would have otherwise been possible. This likely occurs because of the industries in which the venture capitalists focus. Venture capitalists take a monitoring role, demonstrated by serving on the board, maintaining the investment beyond the IPO, and holding a large equity position in a portfolio firm. Finally, it is determined that investor uncertainty is reduced with the quality of the venture capitalist's monitoring skill. A decrease in investor uncertainty was found to decrease IPO underpricing. These findings support the notion that venture capitalists play an important role in new enterprise. (SRD)
Article
Surveys venture capitalists in order to gain a better understanding of the work that they do and their relationships with their portfolio companies. Data were collected from 49 venture capitalists through a questionnaire in 1984. The average investment window for those surveyed was between five and seven years with a wide range amongst those as to the number of investments they pursue annually. On average, venture capitalists are personally responsible for managing nine investments per year. These venture capitalists sat on the board of five of these nine investments. The median response for time spent on portfolio management was 60%. Of this time, approximately 80 hours each year is spent on-site by those who are lead investors. Venture capitalists provide three important services in addition to money: building the investor group, reviewing and helping to formulate business strategy, and filling the management team. Many of the firms that venture capitalists support fail. Reasons cited by the venture capitalists for this failure include ineffective senior management, delays in product development, and problems with functional management. (SRD)
Article
The author presents a signaling model in which high-quality firms underprice at the initial public offering in order to obtain a higher price at a seasoned offering. The main assumption is that low-quality firms must invest in imitation expenses to appear to be high-quality firms, and that with some probability this imitation is discovered between offerings. Underpricing by high-quality firms at the initial public offering then adds sufficient signaling costs to these imitation expenses to induce low-quality firms to reveal their quality voluntarily. In addition, the paper provides empirical evidence that many firms raise substantial amounts of additional equity capital after their initial public offering. Copyright 1989 by American Finance Association.
A clinical examination of convertible debt in venture capital investments, Working paper
  • Gompers
  • Paul
Gompers, Paul, 1995b, A clinical examination of convertible debt in venture capital investments, Working paper (Harvard University, Cambridge, MA/.
What do venture capitalists do? Signalling and the pricing of new issues
  • Gorman
  • William Michael
  • Sahlman
Gorman, Michael and William Sahlman, 1989, What do venture capitalists do?, Journal of Business Venturing 4, 231 248. Grinblan. Mark and Chuan Hwang, 1989, Signalling and the pricing of new issues, Journal of Finance 44, 383 420. P.A. Gompers~Journal of Financial Economics 42 (1996) 133 156
Going public and operating performance, Working paper
  • Mikkelson
  • M Wayne
  • Kenneth Partch
  • Shah
Mikkelson, Wayne, M. Partch, and Kenneth Shah, 1995, Going public and operating performance, Working paper (University of Oregon, Eugene, OR).
Initial public offerings and information asym-metry, Working paper
  • Chris Muscarella
Muscarella, Chris and Michael Vetsuypens, 1989, Initial public offerings and information asym-metry, Working paper (Penn State University, University Park, PA; Southern Methodist University, Dallas, TX).
A theory of fluctuations in bank credit policy
  • Rajan
Rajan, Raghu, 1993, A theory of fluctuations in bank credit policy, Working paper (University of Chicago, Chicago, IL).
The demand for mutual fund services by individual investors, Working paper
  • Sirri
  • Peter Eric
  • Tufano
Sirri, Eric and Peter Tufano, 1993, The demand for mutual fund services by individual investors, Working paper (Harvard University, Cambridge, MA).
Going public and operating performance
  • Mikkelson
Signalling and the pricing of new issues
  • Grinblatt
A clinical examination of convertible debt in venture capital investments
  • Gompers
Initial public offerings and information asymmetry
  • Muscarella
The demand for mutual fund services by individual investors
  • Sirri